Monsanto CEO Discusses F1Q11 Results - Earnings Call Transcript

| About: Monsanto Company (MON)

Monsanto Co. (NYSE:MON)

F1Q11 (Qtr End 11/30/2010) Earnings Call

January 6, 2011 9:30 am ET


Bryan Hurley - IR Lead

Hugh Grant - Chairman and CEO

Rob Fraley - Chief Technology Officer

Pierre Courduroux - Chief Financial Officer


Mike Ritzenthaler - Piper Jaffray

Vincent Andrews - Morgan Stanley

Duffy Fischer - Barclays Capital

David Begleiter - Deutsche Bank

Kevin McCarthy - Bank of America

Don Carson - Susquehanna Financial Group

Robert Koort - Goldman Sachs

Jeff Zekauskas - JPMorgan Chase

P.J. Juvekar - Citigroup


Greetings and welcome to the first quarter 2011 Monsanto Company earnings conference call and R&D topline update. (Operator Instructions)

It is now my pleasure to introduce your host Bryan Hurley, Investor Relations Lead for Monsanto.

Bryan Hurley

Thank you for joining our first quarter earnings conference call. I'm joined this morning by Hugh Grant, our Chairman and CEO; and by Rob Fraley, our Chief Technology Officer. Also sitting in for today's call is Pierre Courduroux who officially became our new Chief Financial Officer this week.

Before we begin, I'd like to remind you that we are webcasting this call. You can access the webcast and two sets of supporting slides at The replay is also available at that address.

We're providing you today with EPS measures on both the GAAP basis and on an ongoing business basis. In those cases where we refer to non-GAAP financial measures, we've reconciled to the GAAP measure in the slides and in the press release, which are both posted on our website.

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

Today's conference call features our seventh annual review of R&D pipeline results. We've changed our historical pattern a bit and have posted an expanded R&D pipeline resource presentation on our website today. That covers additional project updates and back run on our pipeline.

After a short review of the quarter and our guidance update, Hugh will expand on the strategic checkpoints for the first quarter, including our U.S. order outlook. Following that, Rob will take you through the pipeline update.

Let's begin with the core financial results for the quarter on Slide 4 of our earnings slide deck. The first quarter is a small quarter for us, but it's an important step for delivering our commitments for the full fiscal year. Our first quarter results keep us on track to meet our ongoing EPS target of $2.72 to $2.82 as well as our free cash flow target of $800 million to $900 million.

On Slide 5, we roll up our complete guidance elements for our mid-teens earnings growth expectation for the full year. Ongoing earnings per share were $0.02, which is in line with our projections as we return to a more historic earnings pattern in our business. This compared against an ongoing loss of $0.02 per share in the prior year.

On the seeds and traits side, sales increased 13% and gross profit increased 14% as we realized increases across all of our top platforms in the quarter. In particular, that growth was underpinned by the performance of our Latin American seed business. Even with reduced planted corn acres in Brazil, the rebound of planted acres in Argentina and the mixed benefit from increased overall trait penetration in those regions through a double-digit increase in our corn seeds and traits segment.

Within corn seeds and traits, we also saw some additional year-over-year volume increase in the U.S. that tracks with the order book update that Hugh will address in a few minutes.

That growth was complemented by an uptick in cotton gross profit, which reflects our trait performance in Australia as we saw the expected rebound in cotton acreage following several years of drought.

On the Ag Productivity side of the business, overall sales and gross profit were both effectively flat in the first quarter. In Roundup, we delivered $94 million in gross profit in the quarter. The early performance is on track with our strategy as we've repositioned Roundup as the centerpiece of our new weed management program.

With the fall fill in the U.S. and the early Latin American sales and application season behind us, we've seen increased volumes with the lower anticipated net selling prices that tracks against our projected $8 to $10 branded price range for the year.

Our guidance for Roundup in 2011 remains unchanged. We expect to generate $250 million to $350 million in gross profit. Our priority this year will be selling our 250 million to 300 million gallons of Roundup, not trying to take the leading edge of pricing in every geography around the world.

Operating expenses for the quarter also tracked well with our full year guidance. SG&A in the quarter decreased 9% compared with last year. In the quarter, there were $7 million in net restructuring charges as we've now effectively reported the last of our expenses from our restructuring program. We remain on track to deliver $300 million to $340 million in annual savings from this program. With the benefit of restructuring, we lower our SG&A run rate, allowing us to project flat to inflationary growth in SG&A spend this year.

R&D was slightly higher than the prior year as we managed more projects in the latter phases of development, but within our projections to realize our full R&D spend of $1.25 billion to $1.3 billion.

With the shift back to a more traditional earnings cycle, the first quarter this year was a significant source of cash. Free cash flow was $500 million in the quarter compared with a use of cash of approximately $1.6 billion this time last year. That $2.1 billion swing was primarily a timing shift. Last year, because of the late harvest in 2009, prepays largely came in during our second quarter, while for this year the earlier harvest helped bring in more of that cash in the first quarter.

Even with the timing shift, our first quarter cash flow speaks to the cash generation opportunity as we remain on track for our $800 million to &900 million free cash flow guidance for the full year. In terms of cash deployment, we spent $267 million on share repurchases in the first quarter as we used the opportunity to accelerate discretionary purchases against our current authorization.

As a result, in our first full quarter of implementation, we are one quarter of the way through our three-year $1 billion repurchase authorizations. As we complete the walkthrough of the quarterly drivers, the final element to cover is our earnings pattern for the remainder of the year, which is captured on Slide 6.

We expect effectively all of our earnings will be in the second and third quarters. The second quarter is expected to be our largest quarter, while we expect the greatest year-over-year growth in the third quarter. And the fourth quarter is expected to come in at a slight loss as it did in 2010.

With that background on the quarter, let me hand the time over to Hugh.

Hugh Grant

Thanks, Bryan, and let me also wish you all the very best in the New Year. I'd like to begin this morning by welcoming Pierre Courduroux, our new CFO. I've worked closely with Pierre for most of these 20 years at Monsanto and I know firsthand the global business prospectus and the financial skills that he brings for this role.

So I am excited that Pierre joined my senior team this week, and as he comes in, in this new role, among Pierre's first priorities will be leading the company's focus and delivering of financial results from our 2011 operating plans.

And that leads me directly to where we stand as of the first quarter. Q1 was a solid quarter that tracks clearly with our plans and highlighted the areas that we expect to be key drivers in 2011. More importantly, if I stand back and I look at what we can see at this point in the year, there are three key things that really strike me.

First, our pipeline progress continues unabated, and that's the centerpiece of this January call, so I'll leave that for Rob. Second, our early orders are beginning to cruise out the significant shift that we made in our pricing and product strategy in 2010. And third, as that strategy plays out, we have two new product platforms and Roundup Ready 2 yield and our Genuity Reduced-Refuge family anchored by SmartStax, delivering on our expectations and of creating a new dynamic on farm as we talk to our customers.

Lastly, we made a number of strategic shifts to reposition our business to build products and marketing through approaches that work more with our customers.

If you move to Slide 7, we've evolved in our business with more balance across geographies, across crops, and across product offerings. We continue to track well against our plan to deliver double-digit gross profit growth in our global seeds and traits. And that's a function of our portfolio more than as any single product or any single geography.

One of the biggest proof points of that shift in our seeds and traits strategy, particularly in this quarter, can be seen on Slide 8 in our Latin American cotton businesses. With the benefit of larger seed footprints in Brazil and Argentina than we have in the U.S., we're seeing cotton trait penetration move and accelerate the pace.

In fact, 2011 marks the seventh year of commercial availability in Brazil, and we're on track for roughly 60% of our branded seed as a combination of first and second generation yield curve cotton (boro) traits.

In the last month, we have gotten two key approvals, which is a continued sign of the rapid progress in Brazil. The first is for our Double PRO product, which would be the next upgrade that we'd expect to make in Brazil. We also received approval for our five-gene above ground stack, which keeps us in the commercial track for that upgrade in the next few years.

In Argentina, we're now on track to sell more double stacks, reaching roughly 70% of our portfolio, and demonstrating the conversion speed again as we move to the introduction of Genuity VT Triple PRO.

If you shift to the U.S., the first point to make about our seeds and trait strategy is that we're reaching the point where we can start to see the more tangible outcomes of the changes that we made to our product strategy for corn and soybeans in the U.S. With an early harvest behind us, I feel very good about the fact that our products differentiated themselves in 2010.

But what matters more than our data is that our customers have responded to both the product and the pricing changes that we've made, and that feedback is good. So that brings me to the most significant element of our seeds and traits outlook, and that's the order book.

Let me give you the data for how that's shaping up, as well as a read on how it translates to our operational milestones for the year. As of December 31, the order pace across our U.S. corn, soy, and cotton plant farms was ahead of the same point in time last year and tracking well against the 2011 targets.

We built a plan for unit volume growth and building our mix of higher value traits. Against that, our total volume is up; the cash that we've received through pre-pays is up, and our portfolio mix is tracking against our plans.

The earlier harvest certainly helps with a greater clarity. In particular, we moved up the timelines for our prepayments and cancellation deadlines for cotton. So those have been behind us now for several weeks. You see nothing structural in the remaining order cycle that would cause us to adjust our ultimate sales pace.

We have a clear view by second quarter and for what shipments ultimately are, but the first checkpoint is tracking where we need it to be. The order and volume pace put us on track for the targeted mid-teens millions of acres for the three products in our reduced-refuge family in corn.

If you go to Slide 9, a strategic elegance in our corn product strategy is that we have the flexibility to allow our customers to choose which products, what's best for them on their farm. That means in some places we'll sell more SmartStax than Triple PRO or Double PRO and then others vice versa. In combination with our flagship triple stacks in 2011, our reduced-refuge family is on track to give our U.S. corn business an added strategic advantage in the marketplace.

Likewise with widely recognized performance of Roundup Ready 2 Yield soybeans in the marketplace were tracking very well towards our targeted range of mid-teens millions of acres in 2011. That's a step-up from 6 million acres last year and it speaks to same year momentum that we've seen as farmers experience the performance of Roundup Ready 2 Yield in a much broader lineup of varieties last year.

Until the seeds are out of the door, we're not taking anything for granted. The order books are good indicator, but it's not the final ones, and we're letting the business prove out. At this point in the year, you can't really declare a victory, but you do know if you're off plan, and I'm pleased to say that we've seen all the right indications at this point.

At this time in the year traditionally, I get two questions. One is the order book, which we've just covered. And the second is our own round out expectations of U.S. acres and acre shifts. One is the outcomes of the shifts that we've made in our product strategy is the balance across our business, so while there'll be a lot speculation between now and spring planting.

On Slide 10, you can see the imbedded balance between crops, reduces the impact of acreage shifts on our EPS or our ability to deliver our operational plans.

At this time in the fiscal year, our focus is in our operational plans and we're executing against the critical areas that influence the quarter and ultimately the full year. We've also underpinned that with operational discipline, as one of the other things that we did last year was to reset our cost structure to better align with this new strategy.

As Bryan noted earlier in this quarter, we essentially have recorded the last for expenses related to restructuring, which we show on Slide 11. So that's an important milestone to have behind us. We reduced our 2010 SG&A by roughly $250 million from a historical baseline run rate from 2008. Our operational focus isn't just a quarterly checkpoint, it's our daily regimen and I look forward to the opportunity to prove that with mid-to-teens earnings growth in this fiscal year.

I'll wrap up with a word on the one area that I've told is perhaps most important and most impressive at this point in the year and that's our R&D pipeline, it's a continuing competitive advantage. Rob, will always tell you, it's not science for the sake of science. Our unique skill is reducing breakthrough science to practice. And maybe more importantly into products that make a difference for farmers around the world.

So with that, let me give the floor to Dr. Fraley, for the tour of our pipeline this year. Rob?

Rob Fraley

Thanks, Hugh and good morning to all of you on the line. You know Monsanto's hallmark in the seeds and traits business is our technical differentiation. And our ability to discover, develop and deliver the first wave of biotech traits in the last 10 years create a great value for farmers, and gave us an unmatched head start in seed and traits. As the rest of the industry plays catch-up, we're looking to extend our lead and we spent our time where we can create the next round of value for farmers.

So let's begin on Slide 3, in our R&D update slide there and this is the 7th year of providing official R&D updates, and I'd tell you that, given the breadth of our progress that our R&D lead is expanded. And I don't think anyone else has the scale, the capability, the product leads or the ability to apply the experience that we do globally. And over the next decade our R&D efforts should create even more competitive separation for our business.

Let me highlight a couple of the developments this year that excite me the most. Number one, nine projects advanced phases in the pipeline and you can see this best on Slide 4. And I'll remind you that last year we advanced a record 11 projects. So this year's nine additional advancements represented by the orange bars really speaks to the debt and success of our R&D portfolio, as there's a steady march of new commercial candidates, year in and year out. And I'd also point out that four new projects were added to the pipeline this year, demonstrated that our discovery work continues to payoff in generating new opportunities.

Number two, the advancements are very balanced across platforms, across corps and the crops phases. This year, we have a couple of advancements up in key projects in our yield and stress pipeline, and that's complemented by advancements in the major crop platforms in our agronomic pipeline as well.

In fact, if you broadened the look to a two-year horizon, on Slide 5, you'll see that nearly two-thirds of the projects on this chart have been added or advanced.

The third point is the value of our collaboration with BASF on yield and stress is more evidence than ever as we show on Slide 6. I'll cover the phase advancements in detail, but I'd highlight here the value of the horsepower we've gained by working with BASF. The collaboration between our two R&D programs flat out gives us more shots on (goals), and we've literally generated millions of data points to-date, and that positions us best to succeed in this area.

And just as importantly this year, we took a step of extending our collaboration to include wheat, which speaks to the strong relationship between the two companies and to the opportunity to apply what we've learnt in other crops to wheat.

And finally, while this update tends to focus on biotech, our breading program has performed exceptionally and furthering our competitive separation. And you can see part of that outcome in the order book Hugh spoke of earlier, as the 2010 performance for our underlying DEKALB seed and our new Roundup Ready 2 Yield Soybean varieties is clearly a conversation point for farmers this year. And today we have a further update, as we now have the final data in cotton where our next generation DeltaPine Land varieties are mirroring the momentum we've seen in another crops.

So before I dive into the updates I want to share how I think about how we create value through our R&D pipeline on Slide 7. Our competitive advantage comes because we turn research into great products for farmers that creates value. And during the last decade, our cumulative Seeds-and-Traits gross profit is nearly 3 times our R&D spend over that period, which speaks to the leverage we get as we turn R&D dollars into successful commercial products

I'd expect that leverage to continue into the next decade, as the projects we are talking about today continue to create incremental commercial opportunity. We don't take that leadership for granted.

On Slide 8, as you can see we continue to invest against the biggest crop opportunities and with a balanced approach for both breeding and biotech platforms. Now a slice of this investment is in vegetables, and we won't spend much time on that today, but I tell you that the progress that we're making with the advanced breeding in vegetables is quite impressive.

The final item to cover before we get into the specific project updates is the biotech process itself on Slide 9. This is one area where our experience gives us further edge, as we apply the learning's of the past decades to the work we are doing today. And practically, we are now at a stage where our pipeline is evolving from the pure agronomic traits of the last decade to the broader scope, including agronomic, consumer and yield-and-stress traits.

And as we look at that evolution, more testing has been done in the field today than in the lab. And with yield-and-stress, it's not the digital outcome of dead weeds and dead bugs. So what matters is how a trait works in a specific corn hybrid or a soybean variety. And you need the scale from the lab analytics like seed chipping to field testing across the variety of environments to develop the reliable yield data.

Practically that means we're putting more resources behind doing field work in early phases, particularly Phase 2 where we are scaling up for testing yield-and-stress traits. Since the practical hurdle to advance projects for regulatory work is now even higher, we'll have more data in-hand for these next generation traits before we take them into Phase 3 than we did with the agronomic traits.

And with, overall, the increased data and testing in combination with the vastly expanded number of global regulatory reviews, the average development cycle of yield-and-stress traits will likely be on the outer edges of our phase timelines, as we show on the slide. But the pay off, I think is well worth the investment.

I continue to see this as a major competitive advantage for us, as we're the only company with the infrastructure and the regulatory experience to be able to ramp-up a pipeline full of agronomic and yield-and-stress traits on such a large scale.

So that pipeline process update is a perfect segue for our first project update, and you will see that on Slide 10, and that is our nitrogen utilization corn trait is advancing into this expanded phase 2 testing this year. Now this advancement is particularly relevant, as we've had our lead nitrogen traits in Phase 1 for several years, as we've worked to develop the data and understand the mechanism of action around improving yield at existing nitrogen levels or maintaining yield under lower nitrogen conditions.

As you can see from the graph on the slide, our Phase 1 trait testing has shown yield increases versus the control in limited nitrogen environments over two years of testing, and that tells us we have a demonstrable effect. We'll now use expanded testing in phase 2 to develop several years of performance data across a range of environments to allow us to define how the gene functions in different potential germplasm backgrounds and in different stacks with other yield-and-stress traits.

Once we have that in hand, we expect to use that data to define our product concept and identify the lead genes that we'll take into regulatory testing.

If we shift over to the soybean portfolio, we've made a very important advancement for our second generation higher yielding soybean on Slide 11. And I think this advancement is particularly relevant because it shows the power of the Family concepts in the yield-and-stress pipeline.

We now have both first and second generation biotech traits already in widespread soybean field testing, and the trait performance has been strong. If you look at the chart on this slide, you will see that we have multiple events, and across those lines we are seeing significant yield boosts over conventional soybeans.

And I think most importantly, we now have data that demonstrates that the two biotech yield traits have an additive effect. And I think this is really exciting, and that is, when we add our second generation yield trait to the first generation yield gene, we're seeing yield boosts in the range of 7% above our first generation trait.

From here I want to go to our newest yield-and-stress platform, and that's wheat on Slide 12. We actually had two advancements in wheat as we've added a project to the yield-and-stress pipeline, while simultaneously adding our herbicide-tolerant wheat trait to Phase 1 of the agronomic pipeline. And ultimately, our intention is to bring out our first generation product as a stack of both higher yielding wheat and wheat-tolerant to dicamba and (gluphosphonate) herbicides.

We expanded the collaboration with BASF to include wheat in July. And the benefit of that extension is that it even further leverages the joint work we are doing while at the same time creating a new, longer term platform. And we have been able to use the knowledge and the specific genes that we've already identified early in that collaboration, and now apply them directly to wheat, including some of our lead drought and yield genes from the other crops.

Now I'm going to round out our yield-and-stress pipeline report with first generation drought-tolerant corn, D1 as we call it, on Slide 13. D1 is our most advanced yield-and-stress project, and it's already in Phase 4.

So let me give you an update on our progress, and how we are planning to move forward with D1. So as you aware, D1 is targeted to the portion of the Corn Belt where dry land conditions are expected most years. This is the segment of the Corn Belt from the Dakotas to Kansas, which represents about $10 million acres of corn production.

Now the next important milestone for D1 is actually in the regulatory process. We have submitted all the necessary planting and import approvals for D1, and in particular, the U.S. processes are on track to have our single-trait D1 event deregulated by 2012.

And in fact, we just completed the FDA consultation as a key part of the U.S. regulatory approval process this month. Export country approvals for D1 stacks with the reduced Refuge-Corn family traits are expected approximately a year later for the 2013 to 2014 seasons.

Regulatory approvals will allow us to move forward with commercial preparation based on testing and selection of hybrids. And this is an area we are able to directly apply the learning of the commercial introduction of traits like Roundup Ready 2 Yield and SmartStax in order to make the transition to new traits most effective for our customers and for our business.

So here's what we've learnt from that experience and how we expect to move forward on D1. First, we know the size of the hybrid portfolio matters. The broader the hybrid portfolio, the better positioned we are to be able to show a farmer the performance improvement on their farms.

Secondly, getting farmers good experience with the gene in the right germplasm really matters. And we've talked for some time about our testing to evaluate the D1 gene in many different genetic and geographic areas.

From a testing standpoint, this has been the third consecutive year we've had only a minimal amount of drought conditions across the targeted geographies in the Western Corn Belt. And as a result, our ability to test and evaluate hybrids with the D1 trait has been limited.

To address this in 2011, what we're going to do is expand our South America testing program and also add additional locations across the Western Great Plains.

And third, there is clearly another level of insight you get when technology gets into the hands of growers. And so as we move forward, seeing performance on the farm and through customer feedback helps us shape our approach to the broader customer experience, especially in the early years.

So importantly, with the expected deregulation of the D1 event in 2012, we plan to move to directed farmer experience with on-farm beta testing plots, as we give farmers initial exposure to the technology of generating data that informs us on our continued development of the stack D1 products.

Basically, we plan to work with some of our best customers in the target geography to continue to screen for performance, and determine the right hybrids to fill a broader commercial portfolio. And we see this I think as a particularly prudent way to advance this technology.

Importantly, with the beta testing approach, we are going to avoid winter production. So the incremental costs that consume the margins in launch years would be reduced, even while we expect to create a new dynamic for positive farmer experience.

So over the next couple of seasons we'll pour our energy into this approach and provide you with updates on our continued progress.

If we shift to our agronomic pipeline, the lead advancement came with the dicamba-tolerant Soybeans on Slide 14, which moved into Phase 4 commercial preparation. This advancement is significant because it's a big step towards the enablement of the industry's first herbicide-tolerant stack trait package for soybeans. And as we plan to stack dicamba-tolerant trait with the Roundup Ready 2 Yield soybeans.

That means that the dicamba-tolerant trait would represent the first instance of deploying multiple modes of action for wheat control through trait packages in soybeans. And this is a key component of our weed management program that brings together biotech traits with Roundup and other herbicides to provide affordable and effective weed control for farmers.

This year we completed our regulatory submissions in the U.S. and Canada, and our field data continues to underscore the weed control efficacy with dicamba tolerance. Also, broad germplasm testing of the Roundup Ready 2 Yield/Dicamba stack across different geographic zones is under evaluation for this summer, and will be confirmed before we identify our commercial varieties.

Additionally, this is another project where we have worked in conjunction with BASF, as we are collaborating with BASF on new formulations of dicamba that are designed to give farmers improved performance.

The next advancement I'd highlight on our agronomic pipeline is our second generation insect protected soybeans, which moves into Phase 2, on Slide 15. Like our yield-and-stress families, this also speaks to the power of multiple generations of products that creates a continuous upgrade opportunity.

We took a major step this year with our first-generation insect-protected by Roundup Ready 2 Yield soybeans, as we received Brazilian cultivation approval this fall. And now we are moving forward with international import approvals that would keep us on track for our commercial launch of this new platform in fiscal year 2013.

So on the heels of this first-generation product, we now working on our second-generation product in development. And in tropical areas like Brazil, the insect infestation in soybean's particularly heavy. So having two Bt genes in this product will be valuable, because the multiple modes of action expand the spectrum of insect control, creating better control, increasing product durability and also the potential for reduce refuge.

And as you can see on the slide, the amount of damage in testing from the two pests, the soybean looper and the fall armyworm is drastically reduced versus the non-transgenic check. That's the kind of control that U.S. growers have seen in crops like corn and soybean, and I think is something South American growers are very excited in, and requesting.

So my last biotech update is on a project that didn't advance phases, but is poised for our next commercial launch, and that's our Refuge-in-a-Bag, or RIB product shown on Slide 16.

And the next material benefit that we expect to deliver to farmers in the U.S. is the convenience and advantage of RIB, Refuge-in-a-Bag, which we believe will be the next game-changer in corn. And the platform to deliver a single-bag RIB product is created by our refuge reduction products, both SmartStax and Genuity VT Double PRO.

In the last couple of weeks, I've met with growers across Nebraska, Illinois and Iowa, and I can tell you that there is a very clear and high level of interest in RIB.

Now late last year, EPA released its proposal supporting a 5% Refuge-in-a-Bag and convened a Scientific Advisory Panel in early December. We remain on track for receiving regulatory approvals in 2011 to support a 2012 commercial rollout of RIB for both SmartStax and Double PRO.

Since we already had the approval in hand for the refuge reduction down to 5%, the single incremental step of allowing a seed blend for RIB is a natural extension, as farmers anticipate an easier way to manage their refuge requirements.

Now historically, this update is focused only on our biotech advances. But as you know, we spend about half of our R&D dollars on breeding, and our breeding advantage is one of the factors that I think creates the greatest commercial advantage for us.

Just to ground everyone, our breeding pipeline on Slide 17 is similar to our biotech pipeline, but within that there are two distinct product paths. The first is the year-over-year yield gains that our breeding and breeding technology create. This is the incremental yield lift that we see across our crop portfolios as we select better performing material that we bring into the market every year.

The best example of this is our U.S. corn portfolio. Now, I covered this in detail in our November event. So I won't go into great detail here, but I'd like to point out on Slide 18 we have the highlights of our 2010 yield results. And this was the third straight year where our base DEKALB corn germplasm is outyielding the competitive best by more than 9.5 bushels per acre.

And in soybeans, our new Roundup Ready 2 Yield soybean varieties performed as we expected where our yield advantage was nearly 3.8 bushels per acre in 2010.

While corn and soybeans get most of the attention, our breeding efforts in cotton are also showing phenomenal results, which we show on Slide 19 and 20. Like corn, the new cotton varieties for 2011 are consistently outyielding the competitors' as well as our own best varieties currently in the market.

With performance as like what we've seen in the last few years, I think we're entering into an era with our Deltapine varieties where cotton growers should be able to see the steady yield improvement from breeding that has now become expected in corn.

The second area where breeding pays off is in the development and deployment of breeding traits focused on specific targets. We've highlighted some of the current projects on Slide 21. For areas like disease resistance, nematode resistance, fungal disease resistance, the targets are often too small commercially or involve too many genes to tackle with biotechnology. So breeding and particularly marker-assisted breeding gives us the tool to identify, deploy and stack traits in our core crops and in vegetables that complement the biotech pipeline.

So if you take that whole breeding look together, I'd make the strong case that our technical lead is as important and as pronounced in breeding as it is in biotech. And just as importantly, breeding enables a steady yield lift in each of our portfolios. Whereas we replace up to 25% of the portfolio each year, the lift in value we realize can be in the mid-to-high single digits at the pricing level.

So if you move to Slide 22, I can summarize how I think about our overall pipeline and our opportunities. First, our competitive differentiation is our ability to discover, develop and deliver products that matter to farmers. We established our lead with the first generation of biotech products, but I'd tell you with the capability we have and the progress we've demonstrated, our lead continues to grow.

Second, our pipeline shows no signs of slowing down. We're making a steady march of advancements as evidenced by the fact that nearly two-thirds of our pipeline has advanced in the past two years.

And finally, again, we don't take that leadership for granted. We're resourcing our pipeline for success, because it's the life blood of our commercial opportunity. But just as importantly, we're applying the lessons of our R&D work to date and our commercial experience to inform and direct and galvanize the success with the pipeline opportunity going forward.

No doubt 2010 was another phenomenal year for the pipeline, but I continue to think we're really just scratching the surface with the potential of our science and the farmers' solutions it creates.

So thanks for your time. And with that, I'll turn the call back over to Bryan for Q&A.

Bryan Hurley

Thanks, Rob. We'll now open the call for your questions. As we typically do, I would ask that you hold your questions to one per person, so that we can take questions from as many people as possible, especially given that we covered the R&D pipeline here today. You're always welcome to rejoin the queue for a follow-up question.

So with that, we can open the line for questions.

Question-and-Answer session


(Operator Instructions) Our first question is coming from Mike Ritzenthaler with Piper Jaffray.

Mike Ritzenthaler - Piper Jaffray

Thanks for the nice update on R&D pipeline. My question is on pricing. It's a two-pronged question. You gave a little bit of color on this in your prepared remarks, but we've been seeing that price is rising for fertilizer and wondering if that's translating into any pricing changes on glyphosate.

And as far as the seed order book, are there any of your competitors cutting prices? We've been hearing from distributors talk about your competition cutting prices.

Hugh Grant

On your first one on glyphosate, as you've reflected, we are hearing reports of increased cost on raw materials and processing in China. But we haven't seen that translated into rising prices in the market yet. So it's still early days, but we haven't seen that translated. And where we could see it is probably going to be the spring before that washes through.

As we mentioned in our prepared remarks, as I think about this year on glyphosate, our focus will be on selling our capacity. So again, that 250 million, 300 million gallons out there are harnessing in the cost advantage that comes with earning a buck a gallon. We've achieved stability and we just need to sell out what we make.

And then on the seed side, the usual skirmishes as we comment in the New Year, but we haven't seen a major price shift between players. It's a competitive market, but I'd put it down more as a tactical strike and a little bit repositioning of inventory at this stage, but nothing compared to what we saw two, three years ago.


Our next question is coming from Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley

I guess if I could just dig in a little deeper on the order book and maybe specifically the SmartStax and Roundup 2 Soybeans, in your comments you compared this year to last year and you said the order book is ahead of last year. And I guess I just want to dig in on one where you were trying to sell less of both products last year. So how should we actually be thinking about being ahead this year relative to last year given that your acreage goals are higher?

And then just as a follow-up to that, I've often felt that probably the first half of the order book is the easiest part to fill, and you seem to have confidence on the second half of the book. But is there anything different about this year versus last year in terms of filling that second half of the book?

Hugh Grant

We are up on volume and we said that as we rewrote our strategy that we'd be focusing more on unit volume, and we see unit volume up. Across the board, we have seen strong excitement from our grower base, so good feedback there.

If you look at the reduced refuge family, so SmartStax plus Double PRO and Triple PRO, we have increased in confidence I guess that we will hit our mid-teens millions of acres goals and the reduced refuge family and also on our Roundup Ready 2 Yield products as well.

And then your last piece, you're dead right. The first half is easier to claim than the second half, but we're well in the second half and we've seen nice momentum through the top of the year in both beans and in corn. And then funny kind of way, two or three indicators, and none of this is definite about an early harvest, rise in commodity prices, we accelerated our cancellation deadlines and we saw an improvement on prepay, all speaks to farmer sentiment and also be better positioned in the next quarter when we actually truck seed the farm.

We've had some good encouragement from our customers and that accounts a lot when you make the strategic shifts that we've made.

Vincent Andrews - Morgan Stanley

Which of those things weren't you seeing at this time last year, because at this time last year, the order book fell apart between now and February? So what is the change on the margin this year?

Hugh Grant

It's hard to single out one thing. I'd say for me, as I've traveled around and Rob has just done a big swing through in the last few weeks, I think strong grower excitement, good grower feedback, good feedback on the pricing moves that we've made, overall pace is higher than it was a year ago. So you are right, we slowed down in the second half, but pace has been much faster.

Rob Fraley

I've done a lot of meetings with growers over the last month across all the Midwest, and it's a very different attitude. And I think as you discussed, we changed some of our strategies. Some of our price points have been well recognized, well received. Just the overall momentum and having a good early harvest with a big open window for land preparation and seed decisions, this is quite a contrast to last year.


Our next question is coming from Duffy Fischer with Barclays Capital.

Duffy Fischer - Barclays Capital

First, the deferred revenue jumped significantly this year from $219 million last year to little lower $1.3 billion this year, a sixfold increase. The order book is fuller. Some of it is prepayments where maybe the farmer just ordered last year. But can you break that down, because that would indicate kind of a sixfold increase. So what bucket does that fall into?

And then the second one for Rob. This is the second year that none of the drought-resistant stuff in the BASF joint venture has moved forward a phase. Last year was because everything was so wet that we couldn't get to dig it up. But are you running into some obstacles with the drought-tolerant stuff, that maybe that's a tougher thing to accomplish than we thought originally?

Hugh Grant

I'll let Rob pick up on our progress on drought and on deferred payments. I think it kind of ties to the last question on pace and on early harvest and on grower confidence. But in terms of a few discrete blocks for you, Bryan, maybe you have just a couple of words on that?

Bryan Hurley

At this time of the year, you have it exactly right. Deferred revenue at this point in the year is a reflection of prepayments. And so from our perspective, that's the timing shift that we talked about, and it largely leads up to the cash flow that we've seen in this quarter as well.

With the earlier pre-pays, we have more that gets reflected in the deferred revenues. You'll see that move out in the next quarter as we start shipping that seed. But the increase there is pretty much a good reflection of what pre-pays are.

Duffy Fischer - Barclays Capital

And Rob, progress on drought?

Rob Fraley

Yes, I think basically what I hoped I conveyed was, our overall enthusiasm for the yield in stressed areas is as high as it's ever been. And this was I think a pretty remarkable year, because we not only advanced a nitrogen lead but we advanced our second biotech yield trait in soybean. Drought had already been advanced to Phase 4 previously, so the next step on D1 and Drought is getting ready for the commercial launch.

And I gave a pretty detailed update on that, but we actually feel we're on track to get the regulation for the first D1 event in 2012 and then we'll still work through the international regulatory approvals for the stack of the D1 Trait with the various bug and weed combinations in Double PRO, Triple PRO and SmartStax, and that would be ultimately the commercial product we launch.

But now we're excited, and the collaboration as I mentioned, we've added wheat to it and we are already doing the transformation and research to bring yield and drought stress genes that we've tested in other crops into wheat.

Hugh Grant

At the risk of overcooking this, if we've learned nothing else, one of the things that we've learned from our Roundup Ready 2 Yield and our SmartStax launches or some of the accumulated wisdom of the last two years is there is no substitute for getting these technologies into the hands of growers in early stage and then listening to that feedback.

So Rob mentioned beta testing, and we have been kicking around some approaches where we would do literally some of that early beta tests and get that feedback on D1 from progressive growers in that 10 million acre market. So I don't know if that's flushed out yet, but I think that is something that we will be working on in this coming year.


Our next question is coming from David Begleiter with Deutsche Bank.

David Begleiter - Deutsche Bank

On your reduced refuge corn, are you willing to share the breakdown of the three products yet between SmartStax and Double and Triple PRO? And if it is a big corn year acreage wise, could you actually exceed your mid-teens millions acres? Do you have that amount of inventory? Could you go with the high-teens if things are very robust in corn?

Hugh Grant

We won't break out the three until we've trucked in and got on farms. So I would beg your indulgence and ask a bit of patience until we get that done.

And then if the corn crop is bigger, and obviously there is a lot of speculation around that right now, I am not sure we would see much of an overrun on our mid-teens. But if you look our overall portfolio, we would be more than capably satisfied in the reasonable boundaries of crops in the 90s of millions of acres.

I don't think on the reduced refuge piece we would be closing our supply limitations there.


Our next question is coming from Kevin McCarthy with Bank of America.

Kevin McCarthy - Bank of America

I guess a two-part question. First, Hugh, with regard to the U.S. seed order book, just a clarification, is the volume increase and the increase in cash that you've received adjusted for timing differentials? In other words, you've had an early harvest this year versus the prior year. So are you taking that into account when you're attempting to quantify these comparisons.

And second for Rob, I realize it's only phase two, but it's nice to see the nitrogen utilization trade advance here. Can you talk a little bit about the incremental developments that gave you the confidence to do that? And what kind of trade value you'd anticipate given the 5% to 6% yield differentials on the two different events?

Hugh Grant

Kevin thanks very much for the two questions. I'll let Rob talk about nitrogen, but you're right, it's nice to see the project move, taking a few years. So it's nice to see progress there. On the prepays the timing effect, the adjustment and our cancellation deadline and moving that up combined with the early harvest, which was really a great thing for growers of two miserable years of the late harvest.

I think the combination of the early harvest and moving our cancellation deadlines give us clarity and give us clarity earlier, and we saw higher disproportion at prepays than we have normally. And a big piece of that to your point is the timing effect that will wash though in the next quarter, I know many of the people on the line do this.

As you travel through the countryside and you talk to growers there is an optimism around these technologies and a lot of people had good experiences. And we've seen that playing through to the earlier point that we've seen through the first half of the older book translation and earlier enthusiasm. And then on nitrogen, Rob, it's taking a year or two, but we've seen nice progress this year.

Rob Fraley

I talked a little bit about the timing in my prepared comments. I mean basically what we're seeing is that the yield and stress traits in order to get that data and really understand, gene performance in given hybrid background or a given vital background is a much more feel driven data generation. So we're expanding the field testing across our yield and stress traits and also particularly in phase two.

The confidence comes from basically seeing performance gains and multiple years of testing, and repeatability in the different genetic backgrounds. Also, just tremendous amount of scientific inside into the nitrogen pathway that our teams at both Monsanto and BSF have poured into these projects over the last couple of years.

In terms of value, it's probably too early. I mean the particular yield data that I shared with you today was yield increases under fairly significant levels of nitrogen reduction, where the levels of nitrogen had been reduced somewhere between 40% and 50%. And obviously a little bit of the value depends on what's the price at the time the products are in the marketplace and the repeatability of that yield damage. But that's what we'll use a big part of the phase two and phase three testing to nail down. Thank, Kevin.

Bryan Hurley

Recognizing that this update actually goes a little longer, because it's our R&D, we probably would like to extend the Q&A session just a bit to make sure that we get a few more the question in. So if we can do that that would be appreciated.


Our next question is coming from Don Carson with Susquehanna Financial Group.

Don Carson - Susquehanna Financial Group

Hugh, you talked about farmers being excited about your new products and given your pricing and the run-up in commodity prices, its easy to see why, as I look our R2, if you're delivering four bushels at current November futures. Farmers getting about $50 of value for only $5 of cost, which is only 10% of the value-add, and I know the focus is on increasing volumes this year. But how and when do you get back to more normalized value sharing, say, of one third or is one third or is one third no longer what you consider a normalized value sharing.

So is a key to getting back new product features like RIB for SmartStax or dicamba tolerance for soy? How would you see that sort of price sharing unfolding overtime as we get into 2012 and 2013?

Hugh Grant

No offense to the question. So it's interesting, because barely a year ago the debate was one third-two thirds versus 50-50. But with a run up in commodity prices we've seen that skewed. I actually think it's good news, because we launched two brand new platforms, went through a tough time launch in them and we are seeing them proven out in the marketplace and with a repositioning we've seen the return of grower enthusiasm. So I think as one step a time.

I think to your point, when you look forward where RIB with dicamba with a new yield genes in soybeans, the opportunity to stack and build value inside soybeans, and D1 just around the corner. They represent value opportunities for us and more importantly for the grower. I don't see immediate pricing reactions as we go through '11 and in '12.

I really want to get some volume growth in our corn and beans. I really want to reestablish the belief in these technologies and repair some fancy. So I'm more focused on getting seed out of the door and getting it delivered this spring than worrying too much about how much value we've left on the table.


Our next question is coming from Robert Koort with Goldman Sachs.

Robert Koort - Goldman Sachs

I had a question around Roundup Ready 2 versus Roundup Ready. Could you tell us with you mid-teens expectation what share of the Asgrow portfolio would be Roundup Ready 2 versus Roundup Ready 1 this year? And then if we look at your licensees and exclude Pioneer, could you give us the same number for what you would expect out of your licensees?

Hugh Grant

Bob, we're kind of staring at each other under the table here.

Bryan Hurley

Obviously from Asgrow portfolio, that would be most heavily weighted towards the Roundup Ready 2 versus our channels and our licensee partners. But we actually haven't broken out how much of that is Roundup Ready 2 versus Roundup Ready 1 in either of those portfolios. But as always, our brands are always the showcase. And so those end up having the higher proportion of the new.

Hugh Grant

And they sold fastest as well. There is an early enthusiasm around farmers getting their hands on this stuff.

Robert Koort - Goldman Sachs

Maybe you could help with the denominator then. What would you expect on market share for Asgrow soybean this year?

Hugh Grant

Yes, I'd rather get it done, Bob, and we'll come back and tell you once we've achieved that rather than sitting here in January with snow on the ground and speculating on it. So label me as conservative, but I'd love to get it trucked in and get it on the farm before I start guessing about that right now.

Robert Koort - Goldman Sachs

You mentioned the fact that you're going to use beta testing and that's the lesson you learned from some of the execution challenges with SmartStax and Roundup Ready. What would you expect to learn that you wouldn't have learned growing it on your own test fields? In other words, if it was a yield issue, that seems to be a pretty black and white issue. So what would you expect your beta testers to tell you that you wouldn't have learned on your own?

Hugh Grant

Two or three points. One, this is a 10 million acre opportunity. The first mark is going to be smaller than either your previous question on Roundup Ready Yield beans or in the reduced refuge family where you quickly get to north of 100 million acres. So smaller groups are most specialized in application. And I think in that first year, we'll be in thousands of acres rather than millions in that first year.

And what we learned in beans and corn is there is no substitute for listening to your customers. And if you look at the kind of classic beta testing models that the software industry has adopted, the more you listen, the faster you get smart. And I am thinking that we are going to learn a lot on their farms and their fields of how they view drought and how they look at drought on year-on-year basis. So some of it will be anecdotal and some of it will be hard data, but I like the idea of having that early insight with a network of people that are managing more.

Rob Fraley

Yes, I think just to add a little bit to what you said, we are delighted to get the regulation of the D1 event for the 2012 season. But I think we all realize, the real products that will be in growers' hands are going to be the stack trait products, with SmartStax, with Triple PRO, with our Double PRO products, and we'll still need to work through the international regulatory approvals.

So this gives us the benefit of getting the product in the hands of growers, even if they are going to be done under channeling and regulated trials, and get that information based on the performance of the trait under different farm and geographic conditions. And I think that's terrific; I think it's really a great way to get that information and get the product in the hands of growers.

Bryan Hurley

You will be recognizing that we are running over our committed time here. We probably have time for two more questions.


Our next question is coming from Jeff Zekauskas with JPMorgan Chase.

Jeff Zekauskas - JPMorgan Chase

This year, you forecast Roundup gallons at 250 to 300 million gallons. So a quarter of that is around 70 million gallons. Is that about the level that you sold this quarter, or did you sell more, or did you sell less?

And then secondly, in the United States, do you think that you'll gain share in corn seed or do you think you'll lose share in corn?

Hugh Grant

Yes, let me do the second one, and Bryan will have some rough indications on Roundup volume. Your second question was, will we gain share in corn, and I think what we are really chasing Jeff is, we are going to increase unit volume. And then in years gone by, we've sat in these calls and made share forecasts and really, really what you are doing is guessing how big the U.S. cotton market is. So we are responsible for the numerator and we inhibit the denominator.

So our responsibility around the numerator is based on what we're seeing at the moment. I think we will grow unit volume on a year-on-year basis. And when the dust settles in the spring, we'll get a definite answer on how big the American corn crop is and we'll divide those two numbers and report on share at that time. But based on the early order book I feel pretty good that unit volume will be up and the (inaudible), and then on glyphosate, again, 250-300 roughly, Bryan?

Bryan Hurley

First, think about the drivers in the first quarter. The biggest one is you've got Latin America and that is where you get some branded volume, but you'll also have some non-branded volume in their. Overall, the big volume in the year, if you think about the seasonal pattern it's going to be in what is our fourth quarter for that U.S. field season. So that would be the strongest quarter and each of the first three quarters in terms of volume would be less than that fourth quarter. So you're probably a little bit high in terms of volume in that first quarter.

Jeff Zekauskas - JPMorgan Chase

A little bit higher than 70 million gallons.

Bryan Hurley

70 would be a little high.

Jeff Zekauskas - JPMorgan Chase

It would be high, so what did you make, 90 million or so? So should we multiply that by four to figure out the profitability?

Bryan Hurley

No, not at all.

Jeff Zekauskas - JPMorgan Chase

Why not?

Bryan Hurley

Notably it's not fundamentally proportional. So the biggest driver that you have in the first quarter is that we've ramped up our production. And so you get the benefit of that fixed cost absorption over in the first quarter. And as you scale to normal seasonal production you're not going to see the margins quite as high on that. And that's going to normalize very well with the volume pattern that we have. And so when you sell that greater volume in the fourth quarter in the U.S., you're really going to net out to right where we have set our expected ranges 250 million gallons to 300 million gallons at about a dollar in GP/gallon.


Our next question is coming from P.J. Juvekar with Citigroup.

P.J. Juvekar - Citigroup

As you introduced more SmartStax hybrids this year, I think you go from 30 to 60. What did you decided to do with 6121? And Rob, is there enough screening done this year to avoid that Herculex Rootworm gene interaction with the germplasm?

Hugh Grant

I'd just say that 6121 was very solid work horse that had severed us well in previous year. So in it's defense, it was a solid start in our portfolio, but Rob, the fate of 6121 and then a screening as we go exactly 6090 on our hybrids.

Rob Fraley

I though 6121 in our portfolio, I kind of mention that, I think it was in November that maybe a bit tongue and cheek that 6121 still beats the competitive hybrids over half the time. So it was pretty good product and a lot of growers asked for it and so it's in our order book. And I think it would probably surprise people on how well it does this year. And to Hugh's point, the precursor genetics to 6121 in that central Illinois area before last year's heat spell were the rice horses. So we'll see how the weather year turns out. But I think 6121 will surprise a lot of folks, both in terms of its sales and its performance.

Yes, in terms of the other things you mentioned here, we're on track across all of the Monsanto brands and license businesses to put out the additional SmartStax hybrids. And to your last point, I've talked about it before, it's well-known that the Herculex Rootworm trait is a challenging trait to work with. And it really requires careful qualification of the hybrid, so that you have that bug control damage without any impacts on yield. And that's one of the damages of having a very broad germplasm-based portfolio is we apply very strict selection criteria on our hybrids, and the hybrids we released have that strong combination of the bug control and yield performance.

P.J. Juvekar - Citigroup

And just one clarification for you, you talked about price competition towards the end of the season and what happened to prices in base products, like Triples and Roundup Ready 1? Did they stay flat?

Hugh Grant

We've seen some price erosion on Roundup Ready 1. On Roundup Ready 1, what we saw last year that's continued this year and probably at this disproportionate amount of discounting on the old platform and beans from some of our competitors. On some of the older corn lines, I think, PJ, as I said earlier it's tactical, it's localized and its skirmishes as product is repositioned in the countryside. Roundup Ready 1 beans has been more nationwide and has been more aggressive, I would say that, if that helps just for the general color.

Bryan Hurley

So with that we probably need to conclude the question session here. But I would like to save just a minute here for, Hugh, to do a quick wrap-up before we close the call.

Hugh Grant

Thanks, Bryan. And it will be quick. I just want to thank you for your patience this morning. We covered a lot of ground on this call. And I think it was worth going the extra 10 minutes. So thanks for joining us. Thank you for your patience. And I wanted to wish you the very, very best in 2011.

As I mentioned at the start, with this quarter, we passed the first mile marker in our operational plan and delivering mid-to-teens earnings growth in 2011. And it is the first mile marker. Against that backdrop, let me sum-up how I think about the early days of this fiscal year, its about execution and there is work ahead, but I feel good about where we are at this early stage.

I think our operational plans are strong and our progress against the early milestones that matter, whether that's Roundup Ready 2 Yield that we've talked about or reduce-refuge corn. And they give me the confidence that we're turning that plan into a commercial reality. So if the path to 2011 is execution, I think the road beyond 2011 is entirely of innovation. And as Rob, has shown again for the seventh year in a row that innovation isn't just continuing, but it speaks our opportunity to widen the gap and deliver value to our farmer customers.

So again, all the very best to you and to your families as we start a new year and thanks very much for joining us in this call.


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

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