Monsanto's (MON) CEO Hugh Grant on F3Q 2014 Results - Earnings Call Transcript

Jun.25.14 | About: Monsanto Company (MON)

Monsanto Company (NYSE:MON)

F3Q 2014 Earnings Conference Call

June 25, 2014 09:30 ET

Executives

Bryan Hurley - Investor Relations

Hugh Grant - Chairman and Chief Executive Officer

Brett Begemann - President and Chief Operating Officer

Pierre Courduroux - Chief Financial Officer

Analysts

Vincent Andrews - Morgan Stanley

Kevin McCarthy - Bank of America

John Roberts - UBS

David Begleiter - Deutsche Bank

Don Carson - Susquehanna

Chris Parkinson - Credit Suisse

Mark Gulley - BGC Financial

Dan Jester - Citigroup

Tim Tiberio - Miller Tabak & Company

Carly Mattson - Goldman Sachs

Robert Koort - Goldman Sachs

Joel Jackson - BMO Capital Markets

Michael Piken - Cleveland Research

Jeff Zekauskas - JPMorgan

Operator

Greetings and welcome to the Monsanto Company Third Quarter 2014 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bryan Hurley, Investor Relations lead for Monsanto. Thank you. Mr. Hurley, you may begin.

Bryan Hurley - Investor Relations

Thanks a lot, Kevin and good morning to everyone. Thanks for joining our third quarter earnings update. As usual, I am joined this morning by Hugh Grant, our Chairman and CEO; Brett Begemann, our President and Chief Operating Officer as well as Pierre Courduroux, our CFO. Also joining me from the IR team are Ashley Wissmann, Tim Boeker, and Laura Meyer.

This call is being webcast and you can access the webcast, supporting slides and the replay at monsanto.com. We have provided you today with EPS measures on both a GAAP and ongoing business basis. Where we refer to non-GAAP financial measures, we reconcile to GAAP in the slides and in the press release, both of which are on the website.

This call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risk and uncertainty, the company’s actual performance and results may vary in a material way from those expressed or implied in any forward-looking statements. A description of the factors that may cause such a variance is included in the Safe Harbor language in our most recent 10-K and in today’s press release.

So, this morning, we have built our update around the opportunity we see for Monsanto’s long-term growth, including some key announcements around our growth targets, our strategy and the next important step in our capital structure. While we will focus on our longer term growth horizon, let me anchor the conversation with a couple of key results on Slides 4 and 5. Ongoing earnings for the quarter were $1.62 per share. And with those Q3 results in hand, we have the clarity on the remainder of the year and we have raised our outlook to the upper end of our original guidance range for ongoing EPS and free cash flow affirming our full year growth this year. With this quarter, we continue to see our Seeds and Genomics segment as the largest contributor to that full year growth and we continue to make incremental progress on our overall GP contribution, margin expansion and in our ongoing EBITDA.

So with that, let me hand it to Hugh to take us through the updates this morning and the next steps in our strategic outlook.

Hugh Grant - Chairman and Chief Executive Officer

Thank you, Bryan and good morning to everybody on the line. While we always take a look forward in Q3, today we take a bolder approach. Most importantly, we are defining our growth strategy over the next five years and we are beginning to truly use our capital structure more aggressively. In the last year and a half, we have crossed several key business milestones that give us a new level of clarity and confidence and how we see our global growth over a multi-year runway. We have just completed an update of our strategy. The clear conclusion, we see a unique combination of core growth, new platforms and the opportunity to better leverage our capital structure. There is a lot of news in our announcement today.

Let me walk you through each element starting on Slide 6 and tie the headlines to my strategic priorities for our company. First, we are unlocking the next evolution in our strategy. We are not simply a seed company. Today, we are providing multiple solutions to farmers by delivering improved yield technology and the seeds in the bank and in the fields. That translates to a compelling vision of how this industry can expand yields and productivity through the convergence of biology, technology and information.

As farmers become increasingly digitized, information on specifically platforms like precision agriculture becomes the integrator expanding from our core seed business to create opportunity to optimize yields across the 40 plus key decisions that farmers make every season. There is no company better positioned to lead this evolution. That’s who we are. And just as we led the seeds revolution, we are driving the industry to expand the view on how we deliver yields and productivity to our grower customers.

The second point I would emphasize is on Slide 7. With such a compelling vision, we are willing to back our confidence and long-term growth with a new target to at least double our ongoing EPS over the next five years. We haven’t laid out multi-year targets for the past several years. Doing so today is evidence of the confidence that we have in our core business and the transformational potential in our growth platforms. It’s also backed by our focus in our farmer customers and the success that we have had over the past few years as farmers have responded well to our effort to provide more options in value with better performing products.

We believe we have positioned ourselves to sustain the mid-teens plus EPS growth, that’s been our hallmark through a full decade. The ability to target continued growth at that level of a revenue base in the range of $15 billion speaks to the debts of the Monsanto portfolio and the magnitude of the opportunity that our strategy unlocks. The foundation of our confidence is our core business. And as we have listed that outlook to the high end of the guidance range today, we see as an important proof point. Our core business performance is allowing us to deliver our growth commitments and the toughest ag environment in the past several years. Within that, corn certainly has been more challenged by the industry headwinds of declining acres, a tougher commodity environment and direct currency effects, but it’s still a source of expected full year growth in our portfolio.

With some of the macro shifting, soybeans have emerged as a true fiscal year ‘14 highlight delivering record growth that foreshadows the opportunity ahead in the decade of the soybean. So, despite a year where commodity price is reset, corn acres declined in the world’s biggest regions and global currencies became a significant headwind. There is no hesitation. We see seeds and traits delivering a majority of the full year growth to back our guidance. And that performance is a key proof point of our portfolio balance that turns into opportunity as we see this core seeds and traits engine delivering more than $4 billion in total GP growth as the largest driver in our five-year target.

The third key point I would emphasize is on Slide 8, our plan to return an additional $10 billion to our shareowners over the next two years, which is another important expression of our confidence in Monsanto’s long-term growth. Today, we have announced a major step forward that allows us to use the strength of our cash generation and balance sheet. We are now targeting a net debt to EBITDA leverage ratio of 1.5 by the end of fiscal year ‘15. That level would reflect the seasonality of our business, but importantly, it takes our balance sheet from a negative net debt position to one providing an opportunity to use our capital structure and return significant cash directly to shareowners.

Over the past year and a half, we have been working in this plan as we have passed several key business milestones and we move quickly to get to our target level. One of our first capital allocation priorities will be a new two-year 10 billion share buyback program with an expected accelerated share repurchase of approximately 6 billion in the near-term.

And that leads to my final point, with everything that we have assembled today, the roadmap for our growth is as clear as ever. Brett will describe this in detail, but our future growth is enabled by three key elements. We are a global company that has strong embedded organic growth, where a company that’s building transformation on new platforms with compelling growth prospects and we are a company that now intends to use our powerful cash generation and capital structure to compound growth and key value for our owners.

One of the most exciting elements of that as we are now a pivot point for our new platforms start to deliver real growth. These are platforms that we expect will form a key part of our earnings profile in the next five-year period. And this will be one of the focal points of our summer field event as we host our Whistle Stop Tour VII this August. The springboard this year has actually exceeded our initial plans as we have more customers and more acres on all of our Climate Corporation platform products and services. That in turn provides an early confidence point for the ramp up over the next few years for what we see as a transformational platform.

We will outline our specific expectations for the fiscal year ‘15 outlook as we closed out this fiscal year, but fundamentally, we certainly see fiscal year ‘15 as the beginning of the next half decade of growth. At no point have we this much clarity on both the opportunity ahead as well as on the roadmap that gets us there. We are a company that sees growth five years down the line and that’s compelling. We have the strategy, we have the tools and we are focused on delivering.

So with that, let me give the time remaining to Brett to give you the deeper dive into our business platforms.

Brett Begemann - President and Chief Operating Officer

Thanks, Hugh and good morning to everyone on the line. Our confidence in committing to a long-term growth target is a function of both our core business and the new platforms to strengthen our growth opportunity. On Slide 9, you will see that confidence has increased as we have delivered a handful of critical milestones over the past year and a half. Those range from the reinvigoration of our soybean platform with the launch of Intacta and our agreement with DuPont to the establishment of new growth platforms in precision ag and biologicals. Those milestones set the roadmap to our growth on Slide 10.

We believe we have de-risked some of the biggest factors crystallizing our line of sight on what drives our opportunity. That obviously has a start in fiscal year ‘14. It is clear that what we needed to demonstrate this year was that our seeds and traits business is returning as the biggest driver of our growth and that’s on track.

As we walked through the elements, let’s start with corn. Despite continued softening across the macro environment, we expect corn to be a source of full year growth and part of the seeds and traits rebound. That’s highlighted by the most strategically important drivers. We are seeing good price mix lift driven by our portfolio upgrades in all regions and we have seen the COGS improvement we anticipated highlighted by the U.S. That’s even more meaningful in a tougher macro environment. For perspective, this year, corn acres have come down in the Americas by about 5% and currency reflects an incremental headwind to our business of roughly another 3%. Those factors have tempered some of the upside growth this year, along with continued volatility in the Ukraine and some incremental effects in Latin America. There was widespread rain and flooding in Argentina that has significantly reduced our production yields, resulting in much higher costs in the current sales season. Likewise in Brazil, our largest competitor has acknowledged it had some challenges with insect resistance to its key traits making some late pricing adjustments across the current market. Those are all realities of the current macro conditions.

We work through variations every year. We have made our adjustments and we feel good that our global corn portfolio allows us to continue to grow even in a year like this. Our portfolio clearly positions us well for some of this macro shifting and you see some of the corresponding positives in soybeans, where we are on track for record growth this year. That includes both the pure pickup in the core business as planted acres favor soybeans as well as the compounded benefit from drivers that we expect to elevate the earnings power of this platform over the next few years, notably Intacta in Latin America and the overall Roundup Ready to Yield platform in the U.S. The rest of the portfolio is effectively where we expected and complementing the bigger corn and soy engines.

In cotton, there has been a little pickup in U.S. acres that offset a bit of the declining acres in Australia. And in vegetables, we are now tracking with the turnaround in revenue and gross profit contribution we anticipated for the full year. Delivering in this tougher environment pressure tests our strategy and validates the value of our portfolio and that culminates in how we see our growth setup for the next five years. To be clear, we expect the largest driver of our overall opportunity through 2019 is growth in the core seeds and traits business. In that time, we expect to deliver more than $4 billion in new total gross profit growth.

There is a no better example of that opportunity and earnings power than the emergence of the soybean platform on Slide 11. It’s a platform with the fastest expected rate of growth in the next five years. With the progression of Roundup Ready to Yield, Intacta and Roundup Ready Xtend, for the first time, the soybean platform mirrors the multi-stack rapid upgrade opportunity in our corn business.

The most visible proof point is Intacta on Slide 12. Today, we take the early step in what we see is the fastest historical ramp of any soybean trait. The full supply availability is still coming together as weather has delayed harvest in Argentina and we work through the qualification process given the end season drought in Brazil. So, while it’s early, we are very comfortable being able to target 10 million to 12 million acres in the upcoming season. That’s our biggest second year step up in soybeans. It’s three to four times the reach of this year’s launch and twice the level that we saw with the ramp up of Roundup Ready to Yield in its second year. That’s a clear validation of Intacta’s performance and the opportunity.

The majority of this next year’s expected step up will be in Brazil, but we will also begin commercial launch across Argentina, Paraguay and Uruguay passing another key strategic milestone in this 100 million acre opportunity. That catalytic opportunity in soybeans is backed by the continued growth and expansion we see in our biggest platform, our global corn business. More than half of our seeds and traits revenues are driven by corn reflecting the opportunity across multiple layers and multiple geographies. This is an extension of growth we have proven for the past decade, including portfolio upgrades, our expanded footprint and continued trade opportunity all of which drive our mix and volume.

The biggest factor in that opportunity is on Slide 13, our ability to leverage our industry-leading breeding program to upgrade our portfolio every year in every key corn growing region. There is real power in this significant steady engine across our biggest business. There is also a multiplier effect on Slide 14 as we use that same breeding engine to expand our opportunity as we target new high growth markets that drive volume. Today, it’s playing out in areas like Eastern Europe, one of our fastest growing corn regions this year despite the political unrest in the Ukraine. That’s the kind of opportunity that allows us to be on par this year with our record volume years even as acres have shrunk in key markets in North and South America. That core growth in seeds and traits is complemented by our ag productivity segment. Going forward, we continue to see ag productivity as an important strategic support for the seeds and traits growth. And while it’s likely there will be some variability in any year, we see this more in a support role than as a growth driver itself.

My final area of emphasis is on what I think will be one of the most significant incremental drivers and that’s our Climate Corporation platform on Slide 15. This year is a pivot point. We have some important proof points this year that increase our confidence in the ramp up to what we see as a 1 billion acre runway and a $20 billion market opportunity. As farms are increasingly digitized, precision ag can become an integrating point for information, seed, equipment and other inputs.

One of the most important areas of progress on Slide 16 has been in building out that platform. In the short time, since our Climate Corporation acquisition, this partner opportunity has been a highlight beginning with our early collaboration with WinField. We also have agreements with additional anchor partners, including Agrium’s Crop Production Services, GROWMARK, Wilbur Ellis and Helena as well as our first equipment partner, CNH Industrial. Including Monsanto, this is a base with more than $60 billion in total annual sales. And just as importantly, these are partners that touch virtually every corn and soybean acre in the U.S. in some form. That reach can help us take the next step in building an industry platform that makes precision agriculture a bigger tool for our farmer customers.

The next validation point is the interest in the suite of products in our Climate Corporation platform. The response has been far stronger than we anticipated. We wanted to see Climate Basic get a foothold as a free service to build exposure and interest and we believed if we could validate that on 20 million acres, it will be a strong year. As of the end of May, we had more than 40 million installed acres were total acres for all accounts and more than 30 million of those acres are active users using the service in the last 30 days. That means nearly 1 in 5 acres of U.S. corn and soybeans are enrolled giving us an account base that represents an important foundation for expansion and active usage that demonstrates the practical value on the farm.

We also entered the year planning for groundbreakers like experience on premium services like Climate PRO targeting hundreds of thousands of acres. The response has been equally good in this area. We now anticipate the premium offerings will be used on more than 1 million acres across the U.S. corn belt this year. We know this is just a start, but these milestones are a springboard that we expect to move us from an investment platform this year to a real earnings contributor in the next few years on to what we truly believe is a multi-billion dollar long-term opportunity.

Let me bring all these points together. We have passed a number of key milestones in the past 18 months. Those give us greater clarity in our growth outlook for the next five years. Those drivers come directly from the success we have had over the past decade reflecting a strong growing core and new platforms that draw on our powerful technology, Headstart. And that’s both a source of confidence and the point of focus as we target the compelling opportunity in front of us.

So, with that, let me hand it over to Pierre.

Pierre Courduroux - Chief Financial Officer

Thanks, Brett and good morning to everyone. As CFO, my priority is to have a clear view of what drives growth and how it translates into the financials. So, let me give you the highlights from today for financial lengths. Number one, our growth plan builds on the strong growth we have delivered in our business over the past few years continuing that momentum. And with our improved outlook today, we are on track to both deliver our bottom line guidance and to affirm seeds and traits as the biggest contributor of that full year growth.

Number two, setting a multi-year target underscores our confidence in our continued opportunity. I take a prudent approach to our guidance outlook. So, establishing a long-term metric is a reflection of our confidence in our core business, a compelling strategy and a clear view on the factors that drive growth. And number three, having served as several key milestones in our business, we are now well-positioned to better optimize our capital structure. Given the strength of our current balance sheet and our confidence in our growth prospects, we have decided to take advantage of the favorable debt market. By the end of FY ‘15, we intend to target the net debt to EBITDA ratio of 1.5. And one of the ways we will immediately put that structure to work is through a new 10 billion share buyback authorization, which includes our intent to use 6 billion in the near-term through an accelerated buyback program.

I will cover how we will use our capital structure in more detail, but before I do so, let me anchor on the business performance in the current fiscal year on Slide 17. With the visibility from Q3, we now expect to be at the upper end of our original ongoing EPS and free cash flow guidance ranges. With one quarter left, we have good clarity in delivering that updated range reinforcing our growth even in the challenging macro environment and with roughly $0.15 to $0.20 EPS impact from currency headwinds. Q3 came in somewhat better than we projected during our Q2 call with ongoing EPS of $1.62. That relative performance came across the P&L and includes some timing benefits from the core business, operating expenses and taxes.

If you look at the quarter on a year-over-year basis, as expected, the most direct factor in the comparison was the significant tax benefit that increased Q3 in 2013 and did not repeat this year. As we expected, the corn quarterly gross profit contribution was down versus last year primarily as a function of the reduced acre base both for the U.S. season as well as in Latin America, where Safrinha sales also carry into our third quarter. But overall, seeds and traits GP was up in the quarter as continued strong contribution in our soybean business largely offset the timing and acre effects in corn. The year-to-date performance keeps us on track to achieve strong gross profit growth across seeds and traits for the full year marking the biggest overall contributor to our fiscal ‘14 outlook. Through Q3, we have also seen incremental margin improvements in seeds and genomics and within the soybean and corn segments. And that extrapolates to our full year outlook, where we continue to project margin improvement across all three areas.

In soybeans, we will expect another increment of contribution coming from Q4 Intacta sales in Latin America and the second installment of the DuPont royalty reinforcing our full year expectation for a margin increase of 6 points to 8 points. In corn, we have seen very good margin growth in our U.S. business as we have seen the COGS benefit flow through together with the expected gains from our mix uplift. Those benefits have been offset some in Latin America, including the COGS effect in Argentina and the corn pricing dynamics in Brazil that Brett described. For the full year, we expect overall corn margin to still step up, but with those Latin American effects, it will likely come in somewhat lower than our original 3 point targets.

With our updated guidance, we still project a stronger fourth quarter, but given the timing benefit we see in Q3, we now expect to deliver a loss rather than breakeven EPS in Q4. Aside from some of that Q3 effect, we still see the same drivers that reduced the overall year-over-year loss, including the next increments of soybean growth, and uptick in corn as we anticipate less adjustments in U.S. returns and a more typical contribution from our vegetable business. And as a result, we expect to see the last incremental contribution that allows us to get to our full year ongoing EBITDA target of mid to high-teens growth.

If we move to the longer view, our fiscal year ‘14 performance becomes the foundation for how we see our strategy unfolding over the next five years on Slide 18. Working from the fiscal year ‘14 base, we are targeting at least doubling our ongoing EPS by 2019. And I am comfortable that there are multiple sources backing that target, reflecting a good line of sight on the core business, on the new platforms and on the benefit of our capital structure. And the reality is that all those factors should contribute. Likewise, we build our plan on baseline assumptions, so each factor holds the potential to be a bigger relative contributor depending on the different growth trajectories.

We have also left ourselves room to invest for growth, including CapEx to expand our base business as well as for M&A. The single biggest contributor is pure gross profit expansion reflecting the embedded opportunity in the core business. Logically, the biggest source of that growth comes from corn and soybean. These are also complemented by the expansion of the broader portfolio ranging from crops like vegetables, canola and cotton to continue technology development and licensing agreements. We see this opportunity translating to more than 4 billion in total incremental GP, which would mark our largest incremental seeds and traits GP growth in any five-year period in our history.

We also anticipate that the precision agriculture platform will become a meaningful contributor to earnings toward this five-year period. The contribution in the early years is expected to be relatively small, but as that business ramps up, we expect an accelerated contribution. As we look to build new platforms, we plan to align our investments and support them appropriately putting more resources behind these high growth areas and streamlining or redeploying some operating expenses from lower growth business areas.

The performance and operating expense discipline in our core business allows us to make some near-term investments in our new platforms to jump start those opportunities. In FY ‘14, we have invested a little more than $200 million of combined operating expense in precision ag and biologicals. We are planning to run that to an expected level of more than $300 million, $350 million in FY ‘15 as we make investments in the people and infrastructure that reflects our confidence in the earnings potential of these platforms. That is the conscious investment. And while we will step up our spending in FY ‘15, I continue to expect to generate overall leverage from GP to earnings once we passed this initial uptick.

One of the most important elements of our conversation today is our approach to capital allocation on Slide 19. A decision to return an additional $10 billion to shareowners is a result of careful consideration by our teams and the board over the last 18 months as we have achieved several business milestones that provide clarity on our planning and capital allocation. We are targeting a net debt to EBITDA ratio of 1.5 by the end of fiscal year ‘15. That’s obviously subject to the seasonality of our business, but fundamentally, we are comfortable with this leverage level. In the spot of our ongoing strategic planning, we will continue to review and recalibrate our capital allocation as appropriate with the goal of remaining both opportunistic and disciplined. At the level of 1.5 terms of debt, we expect to be able to better optimize our cost of capital while balancing a few key priorities.

On Slide 20, our first priority is to continue to invest in high-growth opportunities that support our strategy and drive growth. We have the financial flexibility to pursue both organic and external growth including investments in our business, in technology deals and M&A. We will be disciplined in our use of capital in this regard focusing on opportunities that meet our growth and return criteria. At the same time we are committed to returning capital to our owners and this capital structure affords us the flexibility to deliver further value to our owners with an accelerated buyback program and through dividends. Another important priority is to maintain our strong investment-grade credit ratings to provide access to attractive financing for our long-term needs as well as in season borrowings for our working capital needs.

One of the first priorities of our capital allocation will be on share buybacks. Our Board just approved a new two year $10 billion buyback program. We will use it in combination with approximately $1 billion that remains in our current program. And as an important first step we intend to use the combination in cash and new debt to target $6 billion for an accelerated share buyback which we anticipate beginning in the near-term and completing in about 6 to 12 months. We likewise continue our focus on the dividend as I view that as a priority element of our strategy as the source of direct income to our long-term owners.

With that let me bring this all together. Monsanto is at a unique point in our history. We have the confidence and visibility into our business to talk about delivering growth that effectively spans a decade. That visibility in turn allows us to take the next in our capital allocation. And from there I believe we can the unique combination of organic growth, new opportunities and our business structure to meaningfully grow our earnings, our cash generation and ultimately return to our shareowners.

Thanks and I will hand it back to Bryan for the Q&A.

Bryan Hurley - Investor Relations

Thanks Peter. With that, we will now open the line for questions. As we typically do, I would ask you to please hold your questions the one per person so that we can take as many from as many people as possible. So Kevin I think we are ready to open the line for questions at this point?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today is coming from Vincent Andrews from Morgan Stanley. Please proceed with your question.

Vincent Andrews - Morgan Stanley

Thank you. Good morning everyone and congratulations on the balance sheet announcement, really well thought out and well done. A question on the corn business, I just want to understand both sort of how to connect what’s taken place this year with sort of what’s underlying the target out to ‘19 and I guess in particular this year is there any issue in terms of returns that you are reserved for in the third quarter because of what’s going on with planted acreage in the North or the recent flooding that you just don’t know what the numbers are and we might learn more about that in ’14. And then as it relates to going forward as we went through the presentation and we saw some familiar stuff on some of the slides, some of the things that I noticed you didn’t mention that I wanted to understand what your view as going forward was, you have historically talked about the 5% to 10% price mix lift and you had also had a target of sort of $1 billion in sales coming from that, are those numbers still good or are we thinking about things differently now?

Hugh Grant

Vincent thanks for your quick question. I think all three of us will take a piece of this. Let me start by saying we are – I think corn had a good year not a great year. Beans picked up a lot of that slack, but if you look across the Americas we saw acreage contract and I think a big piece of our numbers reflects that contraction. And I would say even without contraction we see volume about flat year-on-year. So if you step back, I feel pretty good about the corn performance given the challenges, but I maybe ask Brett to say a little bit about the market and then Pierre maybe a few words on returns and how you see that playing out in that piece of mix as well.

Brett Begemann

Yes, thanks. Thanks, Vince and good morning. I think there is a couple of really key points to think about and it is both this year and as we start to progress into next year. First of all, as we mentioned, we have seen hundreds of millions of dollars lost to less acres in currency this year in our corn business, but as we look at the core of our corn business that was offset by our mix gains in the various regions and the significant COGS improvement that we expected to get in the U.S. And in the U.S., we remain on target for those. And as Hugh mentioned along with that, our soybean business is having an absolutely record year driven by course of new products in soybeans and the build out of Roundup Ready to Yield, but also the portfolio advantage we have is those corn acres shifted to bean acres and we picked up on that.

And then also looking at next year in the corn business as you mentioned, we are going to be challenged on COGS in South America with the production issues that we faced in Argentina with the floods that we had late in the year, but I think as I step back and look at it, I feel good about the fundamentals of our corn business and the strength that we have in the fundamental corn business. And that is literally what gives us the confidence to speak to a five-year plan, where the vast majority of that growth is going to come from our core seeds and traits business.

Hugh Grant

So, Pierre maybe a few words on returns.

Pierre Courduroux

Yes. Maybe to address the specifics of your question, Vincent, regarding returns as we mentioned during the previous call last year, we got surprised in the fourth quarter with higher returns. I mean, we and the farmers actually got surprised with higher returns related to basically the fact that the market was spread in 97 million acres planning and it ended up being on more like 95 million acres. This year we have been very prudent, I think and we shouldn’t be facing such an issue. And this was one of the reasons actually we were anticipating Q3 to be lower than last year in corn. So, I mean, there is no surprise to that. That’s the message we tried to send during the Q2 earnings call and that’s what we see today. So, we feel very comfortable that during our Q4, we shouldn’t see any significant adjustments to our returns.

Vincent Andrews - Morgan Stanley

Because you just speak to the 5% to 10% price mix uplift in that sort of $1 billion target, are those still good?

Pierre Courduroux

So, as far as the 5% to 10% price mix uplift what we see this year is I mean from a margins perspective, we feel really good about the situation in the U.S. where we have seen both the cost of goods upgrades we were anticipating and also the price mix uplift. I mean, it was a more difficult year than we have seen in the past, but we have seen very nice price uplift. So, we still think this is a key driver of our growth going forward.

Vincent Andrews - Morgan Stanley

Yes. Okay, thank you.

Hugh Grant

Thank you very much.

Operator

Thank you. Our next question today is coming from Kevin McCarthy from Bank of America. Please proceed with your question.

Kevin McCarthy - Bank of America

Yes, good morning. Yes, as you execute on the $10 billion recapitalization, can you speak to what implications if any the new program will have for alternative uses of capital I am thinking about trajectory on capital expenditures, SG&A expense, and what are your latest thoughts on M&A?

Hugh Grant

I will maybe ask Pierre to say few words. Our M&A – well, let me take a step back and kind of kick this up a piece, Kevin. We see as Brett made the point in the last question on our five-year growth targets, we see the lion’s share of that growth coming of our core. So, any growth that we see from Climate Corp and some of the new platforms leads on top of that and then the capital allocation piece leverages that growth. So, that’s how we are thinking about it. We will continue on CapEx. We will continue invest on building out our plans to drive capacity as we see share gains. I think as you look at the Climate Corp deal, we see that as a central integrator and that brings together our seeds, chemistry opportunities, fertilizer, machinery and our retail partners. It integrates them around that hub, but within that play, I would assume there is probably still going to be M&A opportunities and we are looking at keeping part – do that. So, I just I think with the five-year view, the key in this is our core business that drives the lion’s share of that growth.

Pierre Courduroux

And maybe as a complement to what Hugh just said, I mean you are still looking at a business with strong cash generation, strong free cash generation. So when we made the decision that when our Board made the decision to vote on this buyback program we had assessed our potential for growth and the potential for cash generation. So we feel actually very good that we are going to be able to fund our business and the growth that we have in our plan going forward.

Kevin McCarthy - Bank of America

As a follow-up if I may on the precision ag component of your plan, I think you described it as meaningful, you are over delivering in the near-term on the acreage, can you talk about what that acreage ramp could look like into fiscal ‘15 and beyond and also update us on kind of the economics of your partnership arrangement and how that flows through the Monsanto on a gross and net basis?

Hugh Grant

Yes. It’s still early for how we are seeing that flow through. Kevin, I would say we are delighted in the performance this year. So when we laid out our goal and have the $20 million, if you draw that against any conventional ramp that we have seen 15 years in our seeds and traits business, it surpasses any of sort of growth from 20 million to 40 million acres in the first year and then see 30 million of that 40 acres as real users or users that using that on a regular basis. It gives us cause for optimism that we are delivering value and that we are growing the consumer experience, but Brett maybe a few words on how these partners are linking in?

Brett Begemann

Yes. I think Kevin as we look at this it’s clearly continuing to build out the platform in early years and the contribution will be in the later years of the five year plan. I would say as Hugh mentioned I think this platform is demonstrating that it can be the integrator of bringing together decisions around how the farmer manages his land, his seed choices, his crop protection choices, his fertility programs, his equipment etcetera. And our goal will be to continue to build out that platform with our partners. And I am thrilled at this point to have basically all of our large retail partners on board with us. We are in conversations with lots of other potential partners to bring that together. So I continue to look at this as very excited given the success we have had in early years. And the real expression of interest from the farmer level with these early acres that’s huge. Farmers are telling us that they are really interested. The key is their behavior followed what they have been telling us that they were interested in. But the build out from a financial standpoint will be later in that five year plan Kevin.

Kevin McCarthy - Bank of America

Okay. Fair enough. Thank you.

Operator

Thank you. Our next question today is coming from John Roberts from UBS. Please proceed with your question.

John Roberts - UBS

Thank you. Could you give us the Roundup or the Glyphosate price volume trends in the quarter and do you become capacity constraint in Glyphosate anytime in this five year plan that you have got?

Hugh Grant

Yes. John thanks for your question. I think I used to say we are half of the business and the Chinese of the other half. We have the smaller half of that now. So we – I like the strategy, we make what we sell, so we make a bunch of Roundup and we sell everything that we make every year and that’s pretty good model for a business. And we price – we lay our price in pretty much right in top of generic Glyphosate. So there is nothing fancy in this but it works, it’s simple and it’s served us well this year. Trends in the quarter – Brett maybe will work on this year versus next year that maybe helpful.

Brett Begemann

Yes. I don’t think that we saw the trends change all that much this year. We started this year say and we will be flat to up through the year. And as I look to the future, I expect Roundup to be flat to down going forward versus the uptrend and we see that playing out in the marketplace going through next year. So I don’t see significant movement on that going forward next year, but the trend would be flat to down. But again it’s in a supporting role of our core seeds and traits business. And as you have said we sell a lot of Roundup every year. And we are going to focus on our core seeds and traits.

John Roberts - UBS

We wouldn’t expect any significant capital then to go to that business, I would suspect over this five-year plan?

Brett Begemann

No. We would no and that’s a great segue John. Today we announced five-year goal of doubling EPS. We see significant growth in the business. Roundup is a great product, it’s a great cash generator, but for more than 2019 looking back it’s going to be our seeds and traits business that really drives that growth is the integration of the Climate Corp platform and how we integrate those two pieces together and that’s really going to be the central, that’s the central core of our growth story at Monsanto going forward.

John Roberts - UBS

Okay, thank you.

Operator

Thank you. Our next question is coming from David Begleiter from Deutsche Bank. Please proceed with your question.

David Begleiter - Deutsche Bank

Thank you. I know you can’t say too much, but should we take that interest perhaps as signs of one either increased interest in crop chemicals or two increased confidence by you of the introduction of GMCs into Europe given recent rulings by the EU?

Hugh Grant

Thanks for the question. I think, I don’t think there is an awful lot of value and speculation. I have always been a really – I have always been a big believer on action speaking lot of those on words. And I think this morning there is probably 10 billion good reasons why we should be focusing on our growth opportunities. Here is how I would frame it. Since November, since the back end of last year when we announced the Climate Corp deal, we have been focused and we have talked a lot about the 40 decisions that a grower needs to make when he is producing a crop. And I see clearly in the next five years that, that Climate Corp deal becomes the center of an integrating platform.

And if you say so how does M&A play in that? I think that there is obviously we talked about this Pierre mentioned earlier, there was obviously M&A opportunities there, but my guess is more of this is going to be done through partnerships, partnerships at the seed level, the chemistry, because chemistry then becomes an integrated part in those 40 decisions, fertilizer, machinery and our key retail partners and how they all come together and that orchestra to play a vital part. So, when you think about it that way, I don’t think this is as much about M&A as much as building that network of partnerships. And I would say this morning and we have been working on this for a long time, but the decision this morning on this new path, I think is an inflection point for the company. And as you look at future growth that the $10 billion reinvestment in our own growth story, I think is more compelling than the M&A argument.

David Begleiter - Deutsche Bank

Very clear. And you just saw in the GM issue in Europe given the EU, given I guess approval to the authority to those individual countries to make decisions. As your confident increases where we might see GMCs in Europe in the next three to five years?

Hugh Grant

In our five-year growth plan, so as we commit to doubling our EPS, but we are not holding our breath on that. I think it’s encouraging that member states are going to start choosing their own destiny, but it just moves achingly slowly. So, I think as we think about the growth opportunities ahead in seeds and traits, we see very real opportunities in the Eastern Europe. We see great opportunities emerging in the Ukraine, but our core growth areas are going to get bigger in the next five years. And I don’t think Europe is going to play a major part in the next three to five years.

David Begleiter - Deutsche Bank

Thank you very much.

Operator

Thank you. Our next question today is coming from Don Carson from Susquehanna. Please proceed with your question.

Don Carson - Susquehanna

Yes, thank you. Hugh, a question on your growth target, is growth from the traditional GMO pipeline diminishing as a kind of contributor to earnings growth? Post Intacta, I think you got a few things in the pipeline like the dicamba tolerance, corn rootworm 3, and the yield and stress, but is that way you are focusing more on the new transformational platforms like precision ag and biologicals?

Hugh Grant

No, I think – so, we have always been very careful, Don, on what really is in adjacency. And I think the Climate Corp deal and the biologicals is a natural extension from driving value in the bank and driving value simultaneously outside the bank. The kind of crunch for us is real simple how do you deliver more yields to the grower on the same acres over time? And if you look, we talked about this in our Investor Day, if you look forward than the next 20 years, there are no new acres. With one or two exceptions, there are no new acres and then sustainable intensification yield becomes more and more important. And the way you unlock that on a sustainable basis is providing better advice to the grower that allows him or her to get more bushels on that same footprint. So you have run through exactly our pipeline opportunities. They come in the next half decade to decade. They are all significant opportunities and during that time I think we have the opportunity to integrate as I mentioned earlier a bunch of other inputs and use them more efficiently and unlock that yield. So I really, really don’t see this as an either or. I see this as in both pieces playing together and that’s I think that’s the beauty in the strategy and that’s what triggered the reinvestment decision and put $10 billion behind that call.

Don Carson - Susquehanna

Just two clarifications, does biologicals contribute at all to your 2019 earnings growth target. And you say precision ag will be a meaningful contributor, can you define meaningful, it will be more quantitative on how you define that?

Hugh Grant

So Don, it’s a little early for us to give precise numbers regarding the 2019. The number we laid out was $4 billion from the core business, from the base business which is really seeds and traits only. Actually biologicals and Climate and the new platforms are separate from these $4 billion. So, microbials by the – biologicals by the end of this five-year period is not going to be very significant. Climate, however, we will have to do some work there to let you guys think about it and we will come back to you with some stuff with maybe a little more detail on how we think about Climate in our projections.

Don Carson - Susquehanna

Thank you.

Bryan Hurley

Thanks very much.

Operator

Thank you. Our next question today is coming from Chris Parkinson from Credit Suisse. Please proceed with your questions.

Chris Parkinson - Credit Suisse

Perfect. Thank you. Can you talk a little bit about the monetization of Intacta, specifically what you are seeing from seeing from your Brazilian customer base as we head into next year. And then also out of your 10 million to 12 million acre estimate, what expectation if any do you have for Argentina and Latin America and South acreage? Thank you.

Hugh Grant

So two there – how is the money flowing and acreage outside Brazil, Brett.

Brett Begemann

I think I will look at this year with the tremendous performance we had in Intacta meeting or exceeding our yield expectations and insect control replacement peaks volumes to the performance of the product which then looking at 10 million to 12 million acres next year which is a huge step up from where we were at 3 million acres this year. So the monetization is going really well. Farmers are seeing the value and they are stepping up to the plate. As to the breakout between Brazil and Argentina the 10 million to 12 million acres is inclusive of all of it. The vast majority of it will come from Brazil next year. We are just getting started in Argentina, Paraguay and Uruguay.

Chris Parkinson - Credit Suisse

Perfect. Thank you.

Operator

Thank you. Our next question is coming from Mark Gulley from BGC Financial. Please proceed with your question.

Mark Gulley - BGC Financial

Hi, good morning guys and let me add my congratulations on the share repurchase. As you move towards getting to $11 plus a share in 2019, how much of that is going to come from share repurchases and how much let’s say from net income growth?

Hugh Grant

Mark thanks for the question. We see the lion share is coming from our core business. Pierre maybe a few words on Climate Corp and how the other pieces layer in.

Pierre Courduroux

I mean really the – as Hugh was mentioning that the lion share of the growth is going to be coming from the business and plus the impact of the original huge buyback we are going to be doing. We are banking on the growth of our business to layout this target of doubling our EPS. And that’s really on the confidence actually we have that we are going to be able to grow our base business and to grow our earnings during that period. That’s one of the key drivers for our decision now to buyback our stock because we think that’s one of the best investments we could make in our own stock basically.

Mark Gulley - BGC Financial

And as a follow-up just a couple of credit type questions, what kind of debt rating do you anticipate having as you move through the share repurchase and what kind of interest rate should we use in our modeling for this?

Pierre Courduroux

So obviously the rating agencies will have to do their work and come back to us and come back to the market with the rating of our debt. It was a priority for us to still be a stronger credit rating and we are confident we will be in a good place but we should hear from the rating agencies shortly. So I cannot anticipate on their final ratings.

Mark Gulley - BGC Financial

And interest rate?

Pierre Courduroux

It will depend obviously on the credit rating and will depend also on the appetite for the market for our bond.

Mark Gulley - BGC Financial

Thank you.

Bryan Hurley

Thanks very much.

Operator

Thank you. Our next question is coming from P.J. Juvekar from Citigroup. Please proceed with your question.

Dan Jester - Citigroup

Hey, good morning. It’s Dan Jester on for PJ. So, as you have this five-year plan, is the Climate Corp, FieldScripts, are those still U.S. focused businesses over that whole five-year period or should we be expecting some geographic expansion due to Canada or Latin America or other regions making a contribution over this five-year period? Thank you.

Hugh Grant

Thanks for the question. The first build out will be in the U.S. So, the encouraging news today was 20 million going to 40 million acres. So, it’s a great Groundbreaker’s start, but I would guess by the five-year period, we will start to see that build out occurring in our Brazilian and Argentinean markets as well. There is tremendous interest there already.

Dan Jester - Citigroup

Great, thank you.

Operator

Thank you. Our next question is coming from Tim Tiberio from Miller Tabak & Company. Please proceed with your question.

Tim Tiberio - Miller Tabak & Company

Good morning. Thanks for taking my question. I just had a clarifying question around your comments around capital allocations ag productivity. I wasn’t certain if whether that was for the overall ag productivity segment or just for Roundup? And as kind of a tie-in there, I noticed that one of your partners has announced the dicamba production expansion in the U.S. And I was just wondering if we are at a point where you can start talking about whether you anticipate that dicamba would be produced internally or whether there is a higher probability that maybe we should be looking more towards the JV type structure?

Hugh Grant

That’s a great distinction. I think the earlier question really related specifically to Roundup. As you look at dicamba, it’s hard to call at the moment, but if I was looking ahead settling the next five years, I would anticipate there is a likelihood that we would be investing in the capital and production. I would anticipate also that our partner BSF may as well and I would expect that beyond us we will see increased capacity going in China and in India as well. So, there is tremendous anticipation and noise in the market. The groundbreaking work, the early trials have really led up to the performance of the product. And I think as an opportunity to upgrade our Roundup Ready choose one more time, but I would expect we will see capital flow, and this opportunity from a range of resources.

Tim Tiberio - Miller Tabak & Company

Great, thanks for your time and congratulations again on the buyback.

Hugh Grant

Thanks very much.

Operator

Thank you. Our next question is coming from Carly Mattson from Goldman Sachs. Please proceed with your question.

Carly Mattson - Goldman Sachs

Hi, thank you. In the context of your capital structure, could you talk to whether there is strategic or commercial reasons to maintain the single A rating or if we should view the new leverage guidance as an indication that Monsanto could be comfortable operating as a BBB credit?

Hugh Grant

I mean, that’s pretty much the question I answered. I mean, we cannot share with – I mean, we don’t have obviously the final credit ratings from the credit rating agencies and they will decide we feel comfortable based on the work we have been doing that will end up in a good place, but obviously it’s totally pending on the credit rating agencies. And as I said, they will have to do their work. And we are expecting them to come back to us fairly shortly.

Carly Mattson - Goldman Sachs

So, there is no strategic or commercial reason though from a business perspective to have a single A rating?

Hugh Grant

As I said, I mean, we feel based on our personal work, the work of our teams that we are in a really good position to run our business going forward.

Carly Mattson - Goldman Sachs

Okay.

Bryan Hurley

Kevin, I think we can go to the next question.

Operator

Sure. Next question is coming from Robert Koort from Goldman Sachs. Please proceed with your question.

Robert Koort - Goldman Sachs

Thanks for slipping me in there, Bryan. Two quick questions. One on the Round Ready 2 Xtend, I think you have targeted 65 million acres, could you give us a sense of what that average acre might spend today on secondary herbicide treatment, so we can think about the opportunity set? And then secondly, Pierre, we know you love to be conservative, but I guess if I look at your forecast, you guess seeds and traits gross profit is growing about 60% in the next five years compared to maybe 50% in the prior five years. If you did the math, you could get to a doubling of EPS just from that alone. So obviously you are buying some stock in that timeframe and I think you have talked about having some accretive benefit from some of the new programs, is there some offsets that we should think about that limit that growth to only 15% a year?

Hugh Grant

So on this six – let me start Bob. So thanks for your questions. On the $65 million, it’s probably bigger than that I think. We are chasing $100 million on Intacta opportunity. You layer 2s on top of that but I think $65 million would be what would be – using Bob’s words on conservative $65 million would be a conservative estimate, right.

Robert Koort - Goldman Sachs

The North American number.

Hugh Grant

Yes. So that would be the U.S. And then any insight on to Bob’s question on spend on acre spend or…?

Brett Begemann

I think the way to look at it Bob is that will be something that we will do extensive work on as we get ready to commercialize the product, but a significant number of farmers have moved to multiple molecules on the field which we have encouraged over the years to minimize the development of resistant weeds and but the Roundup Ready Xtend program becomes a component within that, but there are farmers using multiple herbicides now to get those multiple modes of action. So there is clearly an opportunity to reduce the number of products that they are using and what they are spending today by substituting in Roundup Ready Xtend. But that’s the analysis we are doing now as we look at the product in the field and we will be more definitive on that as we go forward.

Pierre Courduroux

And maybe answering the second part of your question Bob, we feel as I mentioned I mean we feel the lion share of our growth is going to be coming from our core business that’s really the key driver behind the numbers we are laying out and our targets to more than double to at least double our EPS going forward. I mean we are projecting five years down the road and I mean we have got really good visibility on a couple of things I mean mainly on seeds and traits business and that’s where the core of the growth is going to be coming with those $4 billion of additional GP we are talking about. But laying out a five years target I mean I wouldn’t say we want to be conservative, but we want to be very realistic about the number we are laying out in front of our investors so that’s one of the reasons we laid out this target and we actually feel really good about our approach there.

Robert Koort - Goldman Sachs

Great. Thank you.

Bryan Hurley

Thank you very much. Kevin I recognize that we are at the bottom of the hour, given the breadth of the information we have covered here today let’s maybe extend it just a little bit and get a couple of more questions in.

Operator

Certainly, our next question is coming from Joel Jackson from BMO Capital Markets. Please proceed with your question.

Joel Jackson - BMO Capital Markets

Hi. Thanks for squeezing me in as well. I had a couple of questions on your target leverage. So maybe you can talk about how came up with the 1.5 times target leverage range. And then it would seem like if you didn’t do any M&A, I guess what I am trying to get out is if you didn’t do any M&A are you holding by that 1.5 times leverage where in two years you would do more buybacks than $10 billion to get there? Thanks.

Hugh Grant

I was just going to say this is in the – as I mentioned in my remarks at the end of 18 months there is lot of careful work that gives us the ability to continue to invest as we said earlier in CapEx and M&A, but Pierre maybe your view on how you came with 1.5.

Pierre Courduroux

So we came to this 1.5 I mean thinking about how we were going to be able to operate our business. We wanted to keep room for M&A as Hugh was mentioning and investing in our business, so this was really the result of the work we have been doing over the last 18 months that’s how we ended up in this place. And one other things I would like to mention is coming from I mean almost minus 0.5 leverage ratio, negative minus 0.5 leverage ratio and going to the 1.5 leverage ratio I mean freeing up 2X our net debt to EBITDA and that’s worth about $10 billion, so that’s really how we came to that and where we feel good about the move we have just made.

Joel Jackson - BMO Capital Markets

And would you hold by that 1.5 times leverage is that a rigid target that you will hit regardless of the M&A opportunities come two years from now?

Pierre Courduroux

We have mentioned in the script that we would recalibrate over time but we feel really good about this number and that’s really the target we have for the foreseeable future.

Joel Jackson - BMO Capital Markets

Thank you.

Bryan Hurley

Kevin, why don’t we try to squeeze in two more questions here?

Operator

Certainly. Your next question is coming from Michael Piken from Cleveland Research. Please proceed with your question.

Michael Piken - Cleveland Research

Yes, thank you for the question. I just wanted to breakdown into little bit more detail to this $4 billion in growth from seeds and traits, if you could sort of breakout between soybeans and corn and maybe from your other crops, where you see the biggest growth drivers? I know you have talked about the decade of the soybean, but if you could sort of give us some ballpark guidance, that will be helpful?

Hugh Grant

So, our goal was not to breakdown the $4 billion by crops, because as we said there are number of things that are going to happen into the trajectory maybe slightly different from the crop – on a crop-by-crop basis, but what is really clear to us is that corn will have to play a major role as part of the growth. And if you remember what we laid out during our Investor Day earlier in the year, price only should be able to yield about $1 billion. So, if you add volume benefits to that over time, you can get an order of magnitude regarding corn and similarly for soybeans which is going to be the ever key player in this $4 billion. I mean, we laid that at Investor Day as well of more than $1 billion of GP coming from soybeans. So, it kind of gives you the order of magnitudes. But as we mentioned, I mean, we are anticipating that our crops are going to be playing nice parts also in the $4 billion.

Brett Begemann

The gorgeous thing is we got such a nice hedge between corn and soybeans. When you look this year to the growth in beans, it’s still going to be a cotton story, but the beans performance is really a huge contributor as well.

Bryan Hurley

Why don’t we move on and make our last question here before we wrap up with the couple of final comments by Hugh.

Operator

Certainly. Our final question today is coming from Jeff Zekauskas from JPMorgan. Please proceed with your question.

Jeff Zekauskas - JPMorgan

Thank you very much. Is the 10 billion in announced share repurchase over and above the 1 billion that’s remaining from your old share repurchase and can you make a quick comment on the rise in receivables and inventories year-over-year which are up about 20% even though your sales are up about 4%?

Pierre Courduroux

So, regarding your first question, the answer is yes. So the 10 billion that is additional to the 1 billion, so that’s an easy answer. Regarding our working capital we announced really early in the year that we were rebuilding our seeds inventories following two years of challenging production, so the spike you see in inventories was really expected. Regarding the receivables, it’s a combination of factors, one of which being the weights that we have seen in the early days from our high productivity business, which is usually collected during the fourth quarter. So, this is something we are going to be collecting in the fourth quarter we feel really good about. And the second element is just management decision we made not to use some of our credit facilities, customer financing in the third quarter will use the facility in the fourth quarter. So, that’s really the high level story for our receivables increase.

Jeff Zekauskas - JPMorgan

Okay, thank you very much.

Hugh Grant - Chairman and Chief Executive Officer

So, let me thank everybody for your patience and for joining us on the call this morning. As you can tell, it’s obviously a very important day for us as we have laid out a strategy that guides our growth through the next season, but also for the next five years. So, let me just conclude this morning by emphasizing a few points. We haven’t laid a multi-year target for several years. And our ability to do so today is a real statement on the confidence that we have in our core growth and as our core growth and the expansion of our strategy as new platforms like the Climate Corporation start defining even more opportunities going forward. And we are backing that confidence today with $10 billion in share buybacks resulting in a capital structure that I think the major step forward in our capital allocation and it will further strengthen our growth going forward. So, we are focused on delivering that opportunity and we look forward to continuing to share our progress with you. And we hope – we sincerely hope that many of you will be able to join us in August in the field for our Whistle Stop Event, where we will have a firsthand look at this growth story going forward. So, thanks very much for your attention and your support this morning.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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Monsanto (MON): FQ3 EPS of $1.62 beats by $0.06. Revenue of $4.25B (flat Y/Y) misses by $150M.