Monsanto's (MON) Presents at BMO Farm to Market Conference (Transcript)

| About: Monsanto Company (MON)

Monsanto Company (NYSE:MON)

BMO Farm to Market Conference

May 21, 2014 2:00 PM ET


Mike Stern - VP of Americas Row Crops


Joel Jackson - BMO Capital Markets

Joel Jackson - BMO Capital Markets

So we’re going to move on now to Monsanto, which is of course a leading global supplier of conventional and biotech seeds, advanced seed traits and herbicides. Monsanto’s been very busy rolling out its latest Intacta soybean trait in Brazil this year as well as its precision Ag offerings in the U.S. And here to provide an update is Mike Stern, who’s the Vice President of Americas Row Crops.

Mike Stern

Well, good afternoon and thank you Joel for the invitation and have an opportunity to come and speak with you this afternoon and talk to about our business. It’s an important part of the season for us, we’re about halfway through the year we have some visibility into the northern hemisphere, we have a lot of visibility into what’s going on in the southern hemisphere, so that’s great. I’ll be able to give you an update on our business, there’s still a lot ahead for the year but I can certainly tell you that as we think about our seed and trait business going forward in ’14 it’s going to be a significant part of our growth story and that’s despite a very-very challenging year for agriculture where there’s been significant headwinds in the marketplace. Perhaps the most challenging year we’ve seen in Ag for several when it comes to foreign exchange, acres, commodities, so it’s an exciting time for us and we would continue to see strong growth in our business.

I’m going to highlight a few things today and talk to you about some of our key growth drivers in our seed and trait business. I’m going to look at some of the long-term opportunities we have for growth again in seeds and traits, and then I’m going to transition towards the end and talk about our new growth platform in precision Ag and in biologicals.

I will be making some forward-looking statements about future events and the factors that will govern some of these variances can be found in our most recent 10-K so I encourage you to look at that.

I’m really excited about the opportunities in the Ag sector and that’s really -- that’s being driven by some key fundamental macroscopic trends. On this slide I talk a little bit about global corn demand and if you look at it over the past 10 years, we’ve seen about 900 million bushels a year of corn demand increase and that’s a -- a lot of that’s been driven by in the U.S. and about the ethanol but it’s also about the continued expansion of population in the middle class where people are going to upgrading their diet.

The interesting thing about this, 900 million bushels a year, the majority of that demand, about 70% of it was met by bringing new acres into production. If you project forward, we have a more conservative estimate on corn demand hovering between 500 and 600 million bushels a year, the lower estimate is also about leveling out in ethanol in the U.S. but still driven by the same demographics of increasing population, increasing middle class, shift in diets. And the challenge for this next increment of productivity is, is that we’re not to be able to bring significant amount of new acres into production. It’s going to have to come from productivity on the acres that we have or a shift in acres from other crops into corn.

So let me just kind of put that in perspective what does that mean. We have around, globally around 300 million acres of productive corn acres globally and in order to meet this 500 to 600 million bushel a year increase in demand. We would have to increase productivity on those acres by 2% a year. So we’ve never done that before. That’s never happened and if you compel that if you think about the right hand side of the chart, what’s going on with climate change, we can get into a debate of what’s causing climate change but the facts are we’re seeing more variability in our climate, we’re seeing more heat, we’re seeing more severe weather.

Ag already uses 70% of the freshwater consumed on earth, so we will see not only there is need for increased productivity, increased productivity per acre but a sustainable increased productivity per acre as we go forward just to meet this demand curve in corn and you will see and it’s similar in soybeans as well. So growers are going to be looking for innovation that drives productivity on their acre on their farm and that’s who we are. We are an innovative Company we bring technology to the marketplace. We work with growers to improve productivity and I hope you’ll see after my presentation that how well-positioned I believe we are for growth going forward.

So what are some of the key growth drivers, high level for our business, we are very-very uniquely positioned with our platforms globally, both from a trait, crop and geographic positioning. Our core seed and trait business continues to grow particularly in corn and soybeans and it’s driven also by geographic expansion. The core business generates a lot of cash and we’re investing that cash back into the next generation of products, whether that be in seeds and traits or more importantly some of the more transformational businesses we’re seeing in the future around Ag on a precision agriculture and I’ll have a chance to go into a little more detail around that later on in the talk.

So let me give you a read on where we are this season, this year and kind of a mid season checkpoint. Again this has been one of the most challenging Ag environments we’ve had, with significant headwinds around acres, around currency, commodity price, political unrest, the list goes on, but I can tell you that we are on-track in our seed and trait business for our key growth drivers that we’ve highlighted, which would be again the geographic expansion of our footprint, the product upgrades that we see with our traits are mixed upgrades driven by our germplasm globally as well as our cost of goods improvements and again despite the fact that we’re in a very-very difficult macro environment.

I will say as we think about the drivers of the business in some of the macro environment. Over the past couple of months I think we’ve gotten some clarity into some key areas that we’re focusing on, I’m going to point some of those out. So first of all in the northern hemisphere while corn planting if you look, is about at the five year average. If you look specifically into the Dakota so the northern corn belt where there’s about 8 million acres of corn in North and South Dakota and where we have very-very high share, they’re about 10% planted and well behind the average, so we’re looking at whether or not we’ll see potential acre shifts between corn and soybeans in that region but clearly an area that we’re keeping focused on and most of that’s going to play out over the next couple of weeks as planting will continue through the first insurance day which will be May 25th so North and South Dakota there’s some weather impacts and we’re monitoring.

The second piece is Brazil, we have a lot more clarity on our second corn crop in Brazil, the safrinha crop, the winter crop in Brazil, we knew acres who were softening there and as we look at that business those acres have softened considerably given mostly to the fact that weather events are so late planting, again that’s a season where you have to get the soybeans out first, and if it rains too much it takes longer for you to get the soybeans out. So it compresses your corn window and also commodity price. So we are seeing a little bit of softness, more softness than we originally expected in the safrinha acres in Brazil and Paraguay.

And lastly, political uncertainty in the Ukraine, our Corn business in the Ukraine is growing very-very well. It is our fastest-growing business and will continue to grow this year, but the political uncertainty there has taken some of the top-end off of that, as we see some softness and some uncertainty, mostly driven by smaller growers and credit risk, and tightening of credit in the region. So a few headwinds still there, but as I said if I step all the way back and I look at our business, and our fundamental business this year, we are going to see strong seasons trades growth. We see our Corn business is going to continue to grow through global expansion and the upgrades we talked about.

If I quickly shift to soybean, we are on-track with soybean tremendous launch of soybeans in South America. We have gone ahead and had another strong year around the predicted yield in the U.S., and so we see our soybean platform growing as well. And then lastly we have made some investments this past year and we begin to see how we are going to be able to take this precision Ag, integrated precision Ag offering to the marketplace.

So we’re talking about growth of our seed and trait business, and that really is based on the strength of our global portfolio. And if you look at Monsanto five years ago, you would say that, not only the largest part of our business but the largest part of our growth was coming out of North America. Our business today is a different business where we are seeing significant growth happening outside of the U.S., we are still strong growth in the northern hemisphere as well. A couple of things, if you look at the geographic balance on the chart, we operate in all of the key agricultural areas in the world, and if you look at our product mix we are uniquely positioned in the industry.

So in the U.S. we participate in corn, cotton and soybean, and we are the only company that can offer all three of those. So in the U.S. when the acres shift, we are fairly indifferent. The details around our growth might change but the overall growth will not. And we are seeing some of that play-out this year as we’re looking at shifts between corn and soybeans.

If you go into South America, a strong corn business and we have just launched Intacta. So in South America, where over the past year we’ve zeroed out our soybean business, so we are not collecting royalties as of last year, and around a pretty one in Brazil and we never collected in Argentina. We are beginning to grow our soybean bases again with Intacta, and I will spend a lot more time on that. But as our Intacta business grows you’re going to see that portfolio, again that balanced portfolio where if we see shifts between corn and soybeans we are going to become more indifferent. Not this year but in the future you can see the strength of that portfolio.

And then again Eastern Europe, we are seeing significant growth in Eastern Europe in our Corn business, both in Ukraine and Russia and we anticipate that to continue into the future. So regardless of the ebb and flow of foreign exchange and acres and commodity price and political unrest, we’re really uniquely positioned in the industry to grow our business. And I think this year is a good testament to that given the strong headwinds we are seeing across agriculture.

So let me talk a little bit about our Corn business, and more particularly around our germplasm business within corn, which is a key growth driver for us. It’s a critical foundation for the growth in the business and as we look into the future over the next five years we see our corn germplasm business globally contributing a -- just our germplasm business contributing a $1 billion in revenue growth. We introduced about 20%-25% of new genetics every year into the business. We price into those new genetics and grow. We know that -- see the value of genetic increases in their farm and they are willing to go ahead and share the value with us.

The other important thing about our key genetic business is it’s the foundation that we lay our other elements of growth in our Corn business. And so for instance, trait, our global trait expansion and as you begin to think about precision agriculture tools, again offer that strong germplasm base and market share base -- that germplasm business is very-very important. We continue to see the germplasm business growing. We invest heavily in germplasm, so we invest about a $1.5 billion a year in R&D and close to $500 million to $600 million of that is just in our breeding program, for us stripping our competitors. And so we see this as a continued strong element of our growth into the future, and a foundationary element of our Corn business.

Let me take a little deeper dive into an opportunity around our Corn business, in our corn germplasm business. Again, that’s an example of both geographic diversity and growth potential for the business as well as leveraging our investments in breeding across multiple continents. We see Eastern Europe as one of the high growth areas for the Company in corn. Between Ukraine and Russia, there’s about 30 million acres of corn opportunity. That’s about the size of Brazil, so I can put it in perspective from a corn number, and it’s growing rapidly. One of the things we are seeing there is a trend that we saw in Dakota, the North and South Dakota, where we’re seeing a shift from wheat acres to corn acres as we drive productivity in corn, as we drive corn yields higher based on new germplasm, we are seeing that shift. Why is that? Is that most of this agricultural production goes into animal feed, animal production, corn is a more efficient source in animal feed than wheat and so we see that natural switch from wheat to corn as we drive yield and productivity up.

So if you look across both the Ukraine and Russia, the 49th Parallel, if you run that line it also runs right smack into Western Canada. Western Canada there is 20 million acres of agricultural production out there that’s mostly wheat. We see an opportunity to shift the same shift between wheat and corn in Western Canada. So what are we doing? We are breeding what we call early maturity corn. That’s 70 to 75 day corn, that’s the length of time it takes to mature, the further north the shorter maturity you need. We are breeding short maturity corn in North Dakota and Western Canada. It turns out, the climate the demographics, the soil types are virtually identical to what you have in Ukraine and Russia. So for a single breeding investment, in early maturity corn, we will be able to leverage those hybrids both in a growth opportunity in Western Canada as well as a significant growth opportunity in Eastern Europe. So again, a real example of how we are leveraging our technology spend and our geographic footprint in our corn portfolio.

So, let me shift gears a little bit now to soybean and we have done this decade a decade of the soybeans and it’s really for a good reason. We spend an awful lot of time I talked about corn and our investment in corn. About five or six years ago we really began to up our breeding and trait investment in soybean. The only product we had the market was Roundup Ready One soybeans but if you think about where we are today in the U.S., we’re four years into Roundup Ready to Yield, we’re on about 40 million acres of our footprint right now and the business is growing. We licensed the trait to DuPont last year. And that’s going to give us access to their footprint so in U.S. alone we will see this opportunity on around 80 million acres of soybean, just around Roundup Ready to Yield.

The next incremental value we see in soybean, it’s going to be the launch of our Xtend product. Xtend is a dicamba-tolerant soybean, so we’re going to have dicamba-tolerant stock stacked on top of Roundup tolerance in soybean. This is a product that’s going to have opportunity across all the Americas. So it’s going to have opportunity in North America and South America on about 150 to 160 million acres. And growers are looking for better mechanisms to control Roundup-resistant weeds and tough-to-control weeds. We’re really excited about this platform to allow growers to have that choice, that simplicity, and that ability to go ahead and do a better job of controlling weeds in our soybean fields.

So, two big elements of growth there, but the third piece is Intacta, and we just came off of our launch of Intacta, it was the largest launch of any soybean trait we’ve ever made. I will get into a little bit more detail, but it has been very-very successful. Growers had a couple of years, to look at the product in South America, we launched it on 3 million acres and we have seen a tremendous excitement in the grower community in South America. And it’s 100 million acre opportunity of Intacta alone and remembers, that’s off of a zero base because we zeroed out our base in 2013 on Roundup Ready One.

So if you kind of think about the soybean business and where we are, and the corn business with a Intacta Xtend product in South America. That is a triple stacked soybean. So we have dicamba-resistance Roundup-resistance and a BT trait to control bugs. That’s very-very similar to how we saw ourselves progressing through our corn portfolio where we started with triple stacked corn. So we are seeing this stack trait opportunity in soybeans and we are very-very excited about the growth opportunity of the soybean business, predominantly across the Americas.

So let me dig a little bit more into the Intacta launch again. I mentioned that we had of very-very successful launch of Intacta soybeans, largest launch of our product soybean product in our history and the first product we’d ever launched specifically in South America. So some key milestones there, we launched on 3 million acres Roundup Ready to Yield. We launched on 1.5 million acres in the U.S., and we expect a fast ramp-up. In our first year we had 30 varieties in the marketplace in Roundup Ready to Yield in the United States, when we launched we had about 15, and in our coming season 2015 we expect to double the amount of varieties that we have in Intacta, in Brazil alone. So we are very-very excited about the product performance, the product offering, and what we’re going to have to offer our customers. And of course our customers are telling us their excitement as well, as they see the performance of the product.

So I can tell you while we are still working through our final production plans in South America. We’re just finishing up harvest of soybeans in some of those areas. While we are not -- I’m very-very confident that we are going to be on double-digit millions of acres of Intacta across the South American region in 2015 and we will have an opportunity as we shore up our production numbers to come back and be more specific about that, but there’s no doubt in my mind that this is going to be the fastest ramp we’ve seen in soybeans and we’re off to a great start.

So, let’s talk a little bit more about specifics of Intacta. Just had an update earlier this week where we now have 80% of our field trials in and we’re still seeing greater than a four bushel advantage with respect to yield where our win percentage is about 80% so our head-to-head, so we’re seeing tremendous performance. And if any of you have had a chance to travel in South America and Brazil and a chance to actually talk with growers down there they will tell you how excited they are about this technology so it’s both a yield trait as well as a trait that’s going to allow them to do a better job in controlling caterpillar, bugs in their field, and so there’s elements of value to Intacta, one is a yield lift okay, which we’re measuring here, the other is a decrease in the use of insecticides on their farm. So we’re seeing in sprays going, on average moving from four to five sprays per field maybe down to one or two.

So those are the two value propositions that a grower sees and part of that is just the convenience of not having to go across the field spraying as much, and as we think about this platform, we had significant ground breaker trials in both Paraguay and Argentina this year and we’re seeing the same type of results in those trials as well, so we’re going to be launching in a more significant amount in Argentina next year, and we’re just very-very excited about the technology, it’s a significant growth opportunity and we see a $1 billion of growth over the next five years just in the Intacta platform in South America. We’re well on our way to going ahead and kicking that type of growth off.

So in closing -- and in the last few minutes let me finish up with our precision Ag platform as well as our microbial platform, and biological platform. This is a really exciting area of agriculture and why I’m so excited about it is the same reason why I’m excited about Intacta, and that is growers are demanding, information solutions, they’re looking for companies who can come together and provide integrative solutions that can help them manage variability on their farm and make better decisions. A grower typically makes about 40 decisions a year on their farm and typically these are reactive decisions, they go out, they walk on their field, they say oh I have a problem, I have a bug problem, I have a disease problem, I have a fertilizer problem, fertility problem and then they go ahead and act and by that time you’ve already lost some of the yield and that’s why we see variability in yield, year-over-year.

We’re going to -- what we'll be able to do and we are going to with our precision Ag offering around climate is really go ahead and help these growers make proactive decisions to be able to predict what’s happening in the field and make proactive decisions that can drive productivity. In February we brought all of our precision Ag together under the climate platform and so that’s everything from our, everything from field scripts to precision planting, to climate tools as well as our insurance products. And we see a tremendous opportunity in this business, this year we’re out with well over a 1,000 touch points in the marketplace leveraging our retail distribution network, our equipment distribution network with precision planting and ours insurance sales network through climate, so we’re off to a really neat start and again growers are very-very excited about us bringing solutions to them in this area.

Now this year is not going to be a year where we have a lot of, it’s materialism in these products but a lot of opportunity to go ahead and get experience in the marketplace and we’re working very closely with our retail partners in this, if you think about our seed business our seed business we have germplasm, we have traits to meet seed treatments, we have brought all that together to drive yield on farm, and we do that often through our retail partners and we see the same thing happening with the next increment of value which is going to be in our precision Ag business. We are in conversations with all of our retail partners but the big ones that represent 50% of our sales in the U.S., we’ve already signed a deal with WinField with respect to our precision Ag platform and we’re very-very excited about continuing to go ahead and work closely with our retail partners in this area.

After all this is all about decision making, it’s all about seed, it’s about crop protection, it’s about fertility, it’s about agronomy and our retail partners are out in front of our customers providing these services and this expertise every day. They’re a critical part of this and we’re very-very excited about the collaborations we are forging with them. And not just our retail partners, we’re looking to open this platform up to other seed companies, equipment companies, we see this as an opportunity to bring all the information and decision tools together under a single platform where we can use the climate, our capabilities to drive decision making tools for farmers and drive productivity.

As we think about some of the specifics and how we look into the future and how we walk through this, again I mentioned that our offerings this year are not going to be material, we’ll be on a couple 100,000 acres of paid, paid acres between field scripts and Climate Pro, but what’s really exciting is if you think that with a progression so our Climate Basic which is a free offering that helps growers think look at local weather on the field rain, field workability and growing stage of a crop, we’re on well over 20 million acres now of Climate Basic, okay.

This year, we also was the first year as we brought together our precision planting equipment. We have bundled offers of precision planting equipment in the cab where we look at our fieldview app on our iPad, which is the link that allows us to transfer information to the cloud and back into our fieldscripts engine or into climate. We’ve gone ahead and bundled those offerings with climate basic so automatically downloading Climate Basic and a free opportunity to take a look at Climate Pro, and so we’re seeing great uptake in that this year. In the marketplace we’re establishing this integrated platform with the growers, and as we move out into the future not only do we see this opportunity to make recommendations on our footprint, okay and globally we are on 400 million acres if you look at our seed footprint, but this is truly a much bigger opportunity this the billion acre opportunity because it doesn’t have to be our seed footprint and it doesn’t have to be even a corn in an area that we’re participating in, it can be broader crops. That’s the breadth that we see this platform having impact on.

And again I come back to the farmer. Growers are really looking for companies to come and bring them solutions in this space. They’re overwhelmed with data, they’re overwhelmed with offer and I would just say we are uniquely positioned with we’ve established this platform and the acquisitions we’ve made and our own seed footprint, we are uniquely positioned to be able to provide growers that clarity and integrative solution.

So quickly just to close out on our new biological platform, I’m very excited about this as discovery platform in biodirect again biodirect is a new mechanism by which we can begin to look at controlling weeds, insects and disease, it’s based on RNAi technology which is using small naturally occurring pieces of RNA that actually control the expression of genes in plants and in animals and we’re seeing early excitement around being able to control Roundup resistant weeds from a crop protection perspective and a control beetles and bugs from an insect protection, it’s early with biodirect but we see this as a tremendous opportunity as a new platform in the future.

Coupled with that is our bio-ag alliance, we just closed a deal with Novazyme and this is a really interesting deal for us, it’s a great symbiotic relationship with Novazyme. We bring to the table on an extensive crops platform in corn and soybeans, a field testing network. Expertise in microbials as well as genetics, they’re going to bring to the table expertise in microbials as well as production capabilities and so, interesting thing about both of these platforms in the future is these are non-GMO, these are non-transgenic platforms, or non-GMO platforms, we think we’re going to be able to move them quickly to regulatory and touch global areas that we have not been able to touch in the past.

Joel Jackson - BMO Capital Markets

Mike, there’s about a minute left in your time.

Mike Stern


Joel Jackson - BMO Capital Markets

Maybe you could answer one question, would that be okay?

Mike Stern

Yes, fine, just to close real quickly here, I just want to say we’re really confident in where we are with our corn seed and trait business this year and is it the future, I’m really-really excited about the platforms we’re transforming in the future in precision-ag and biological structure.

Joel Jackson - BMO Capital Markets

What we’ll do we have a question from the -- I’m going to ask first to save some time here. So the question is, how is Monsanto benefit from Cyngenta marketing fee that didn’t have export acceptance in China?

Mike Stern

Yes that’s a -- so absolutely the mere trait 162 doesn’t have, it’s not approved in China. Growers are making decisions about I can’t -- I’m not going to be able to quantify exactly what we’ve been able to do, I think there’s some uncertainty in the marketplace around those products from Cyngenta and I think clearly growers are making decisions that I’m not so sure I want to take the risk of not having a market to sell my grain and so I think there have been some opportunities, but we haven’t really quantified those.

Joel Jackson - BMO Capital Markets

Great, thank you very much.

Mike Stern

Thank you.

Question-and-Answer Session

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