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Monsanto (NYSE:MON)

Q3 2011 Earnings Call

June 29, 2011 9:30 am ET

Executives

Pierre Courduroux - Chief Financial Officer and Senior Vice President

Hugh Grant - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Bryan Hurley - Director of Investor Relations

Analysts

Michael Picken - Cleveland Research Company

Michael Cox - Piper Jaffray Companies

Vincent Andrews - Morgan Stanley

Jeffrey Zekauskas - JP Morgan Chase & Co

Donald Carson - Susquehanna Financial Group, LLLP

Mark Connelly - Credit Agricole Securities (NYSE:USA) Inc.

James Sheehan - Deutsche Bank AG

Kevin McCarthy

Laurence Alexander - Jefferies & Company, Inc.

Duffy Fischer - ClearBridge Advisors

P.J. Juvekar - Citigroup Inc

Operator

Greetings, and welcome to the Third Quarter 2011 Monsanto Company Earnings Conference Call. [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

Thank you, Rob, and good morning to everyone. Welcome to Monsanto's third quarter earnings conference call. This morning, I'm joined by Hugh Grant, our Chairman and CEO; and by Pierre Courduroux, our CFO. Also joining me are Manny Cruz and Ruben Mella, my colleagues in Investor Relations. This call is being webcast and you can access the webcast and supporting slides at monsanto.com. The replay will also be available at that address.

We're providing you today with EPS measures on both a GAAP basis and on an ongoing business basis. Where we refer to non-GAAP financial measures, we reconcile to the GAAP in the slides and in the press release, both of which are posted 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 statement. 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.

For today's call, I'll walk through a brief review of the financial results. Hugh will then take a deeper look at where we stand on our overall strategy in this fiscal year, and how that informs 2012. Finally, Pierre will focus on the guidance and the translation of that strategy to our financial outlook.

For the financial review, I'll anchor off our guidance update, which starts on Slide 4. For ongoing EPS, we've stepped up the full year guidance range to a new range of $2.84 to $2.88. That translates to ongoing earnings growth of between 17% to more than 19% over last year. That means against our target to re-establish momentum with mid-teens earnings growth, we now anticipate delivering ongoing growth in the high teens this year. That step up also flows through our free cash flow outlook where we've raised our guidance for the second time, with a revised full year outlook of $1.1 billion to $1.3 billion.

Pierre will go into greater detail on our overall guidance outlook and the drivers so I'll focus on a snapshot of the financial performance on Slide 5. The strength of the wrap up of the U.S. season in combination with the contribution across our businesses resulted in a better-than-expected third quarter and underscores the new growth expectations embedded in our guidance today. Q3 re-emerges as 1 of the most significant annual earnings drivers this year, with ongoing earnings per share at $1.26, compared with $0.81 in Q3 last year.

Looking at the detail, the starting point is Seeds and Genomics. In a critical quarter for the U.S. and for our Seed business, Seeds and Genomics gross profit increased more than 20% year-over-year. That keeps us on track for double-digit gross profit growth across the segment for the year, as each of our core Soybean, Corn and Cotton businesses have delivered double-digit gross profit growth in Q3 and for the year-to-date.

Corn Seeds and Traits gross profit is up 19% in the quarter and 10% for the year-to-date, reflecting growth across the globe in our Corn business in the absence of the 2010 restructuring items. Soybean Seeds and Traits gross profit increased 17% year-to-date, translating to an increase in gross profit margins of nearly 7 points to 66%. That reflects the mix benefit from Roundup Ready 2 Yield, as well as a portion related to benefits we're seeing this year, both from the lower cost of goods in the U.S. and the trade collection for Roundup Ready soybeans in Brazil, where the combination of strong yields and a healthy commodity price provide upsides on the royalties we collect through our value capture system there.

Following the trends from the first half of the year. Cotton Seeds and Traits continues to perform at the high end of our expectations, with gross profit growth more than 30% as cotton acreage rebounds and we see greater trade contribution from the U.S., India and Australia. Vegetable gross profit is effectively flat through the first 9 months. With this segment's largest quarter coming in the fourth, we began to see the positive product sales mix in the third quarter, and we expect that to continue resulting in full year growth.

Shifting now to Ag Productivity. This is our second quarter of reporting consolidated results for the Roundup, selective chemistry and lawn-and-garden businesses. Year-to-date, Ag Productivity has delivered a cumulative gross profit of $565 million. From a continuing business standpoint, the gross profit contribution comes from 2 sources. One of the most significant relative to our initial expectations is the contribution from our lawn-and-garden business, which is on pace for a second year of above historical profitability for us, despite wet weather this spring.

The second factor is the good response from our customers through our Roundup repositioning, which is driving volume and keeping branded pricing at the high end of our expectations. Below the line, expenses are tracking along the pattern we expected. In the quarter, SG&A expenses stepped up to $591 million, following a run rate near $500 million in the first 2 quarters. This tracks with the uptick we expected as the year progressed, and we realized more expenses for investments in our people through annual salary adjustments, typical sales commissions and the annual incentives, as well as the scale-up for new product launches.

R&D expenses for the quarter and the 9-month to date are tracking higher than last year as we continue to invest along our expected growth path to make annual incremental investments in R&D that help fuel our future growth.

Our tax rate was 28% in Q3, translating to a rate slightly above 29% for the year-to-date. From a free cash perspective, today's guidance increase reflects the continued strong translation of earnings into cash from our core business growth and through our working capital management. Through the 9 months, free cash flow was a source of cash of $237 million, compared with a use of cash of $1.15 billion last year. That's an improvement of $1.4 billion that comes from a couple of key factors. Notably, free cash flow for the 2011 period does not include the cash effect of the Roundup repositioning that was reflected in the year-to-date period for 2010.

From a direct business perspective, the early year trends have held as our overall free cash flow for 2011 is benefiting from higher net income and from our improved working capital management. Our most significant uses of cash in the quarter continue to be our share repurchase and dividend payments. On share repurchase, we spent an additional $105 million in the third quarter, taking our cumulative total to $487 million, or nearly half of our current $1 billion repurchase authorization.

With that backdrop on the financial performance, let me hand the time over to Hugh who will walk you through the strategic scorecard.

Hugh Grant

Thanks, Bryan, and good morning to everybody on the line today. I'll focus today on a strategic look at our business but before I do that, I want to bring up one item that doesn't directly relate to our third quarter business performance. As we indicated in our press release earlier today, the staff of the Securities and Exchange Commission is conducting an investigation regarding Monsanto's customer incentive programs relating to glyphosate products in fiscal years 2009 and 2010. Monsanto has received the subpoena for documents from the staff, and while at this point, there's not much additional color that we can add, when there's a development like this, I want to be up front and share it as directly as I can with you. We take this seriously and we're cooperating with the SEC.

So having noted this new item, let me move back to a discussion of our strategic focus. I recognize that this is a call where you expect to hear about the performance of the business. Fiscal year 2011 is an important year for us as we implement our new strategies. And just as importantly, the third quarter is a significant checkpoint. With Latin America well into harvest and the U.S. selling season practically complete, the third quarter effectively concludes 2011 from an operational standpoint. I tell you that we believe momentum was building in the business, and momentum's a really interesting thing. When it's shifting, you feel it when you talk to your customers long before it shows up in your numbers. Now, we have the numbers to back that feeling.

As we do the diagnostics in 2011, here's my view. First, at the beginning of the year, we said we'd built a business, powered by a Seeds and Traits engine and we expect that on average, over time, that engine delivers annual mid-teens earnings growth. We expect to make good on that target. In fact, our new guidance positions us to deliver growth in the high teens in this very important foundation year. That doesn't alter our long-term view of the engine itself but it does mean that going into 2012, we believe the elements are in place, particularly within our Seeds and Traits business to sustain mid-teens growth even off this higher base.

Second, that gets to where we stand in 2011 because even more than the pure numbers, what we've accomplished strategically this year sets up our opportunity for the next stage of growth. We made some significant changes to our product strategy in both the Seeds and Traits side and in our Glyphosate business. These changes were big and they reflected the feedback that we have directly from our customers. So delivering out of the gate was important. And at this point, I can tell you that the results of those product strategy changes are going well. We hear it from growers, we see it in our numbers and we feel it in the momentum I mentioned earlier.

So I think of this as a strategic scorecard for the business, and that's reflected on Slide 6. I'll walk you through the detail behind some of the most prominent factors but let me summarize my takeaway. First, we're back to a growth mode in Seeds & Traits and we're seeing that show up in our global volume growth, including the opportunity for share gains in all 3 major crops in the U.S. Second, our primary, new U.S. products, the reduced refuge family in Corn and the Roundup Ready 2 Yield products in soybeans, both stepped up by at least 10 million acres apiece to become Monsanto's new platforms in these crops. And third, we've demonstrated significant growth as we expand our base business into a broader geographic set, particularly in the areas where technology use is expanding and where we see the next wave of growth.

On the specifics, the place to begin is Corn. We anticipated that our new product strategy would reignite volume growth in the U.S., and it has. In the U.S., our Branded Corn volume has grown by the largest increment in the past few years. That means that against the U.S. Corn market that's set to expand over last year, our volume grew faster than the market. So even with some shifting still happening on acre projections and the potential for higher returns coming out of a wet spring, we're well positioned for organic share growth in our U.S. brand platform, including our DEKALB brand.

The U.S. growth is complemented by volume growth in Latin America. With harvest in Brazil and Argentina nearly complete, we have volume growth in our brands in both countries. In Argentina, the overall market expanded significantly and our volume outpaced that growth, further expanding our leading share position. In Brazil, planted acreage rebounded some and with our volume growth, we've maintained our leading share position. If you widen the lens and you look globally, we grew volume in every significant corn-growing country.

Another factor in Corn highlights the importance of mix, and in particular, our trait platforms. We made a significant product strategy shift last year in U.S. Corn. We moved the product ladder, expanding the 3 products in our Genuity Reduced-Refuge family. Those were SmartStax, VT Double PRO and VT Triple PRO. Getting that 3-product family established in 2011 was a key milestone to set our future growth and we targeted the range of mid-teens millions of acres as our foundation. If you go to Slide 7, today, we can say that we've delivered in that range and more importantly, we established the Reduced-Refuge family as the Corn foundation of our future in the U.S.

As we projected from a base of about 3 million acres last year, the acreage planted to the Reduced-Refuge family stepped up roughly 10 million acres in total to approximately 13 million acres in just the second year of commercial scale. To put that in context, that's the largest second-year step up of any previous corn trait package in our history. Just as importantly, the Reduced-Refuge family is well positioned to expand farmer choice and it's expanding our high-value technology penetration and thus, our mix.

In 2009, our triple-stack products peaked at about 31 million acres. By this year, the combination of triples and the Reduced-Refuge family, is on approximately 37 million acres, which in turn upgrades more acres to our highest value offerings. With the momentum of customers and the adoption trajectory to say that the Reduced-Refuge family has established itself as the platform for our growth in Corn. And from here, we will do 2 major things. We'll scale up all 3 products again next year to increase availability to farmers and make them the leading product set we offer in every zone as we launch new traits. They'll be available to be stacked in each of the products in the Reduced-Refuge family. The first opportunity will come as we launch Refuge-In-the-Bag for SmartStax, and following regulatory approval, also in Double PRO.

The final Corn highlight is Latin America Corn Trait penetration, as covered on Slide 8. As you think of the new areas of growth, the ramp up of Brazil and Argentina in both trait adoption and upgrades is one of the most significant elements that define the landscape in the next few years. In Brazil, we're just in our third year of commercial trade offerings and trait penetration in our brands jumped to 64%. Just as importantly this year, we launched our second generation above-ground insect package, and we received in-country regulatory approval for 2 more next-generation stacks. I think I have really underscores the speed of which Latin America is moving. Before any one trait reaches full penetration, we already have an upgrade available. The story is similar in Argentina. Our trait penetration expanded in a growing market but the pacesetter here comes from the fact that we received approval for our Genuity Triple PRO in Argentina less than a year after the commercial scale-up in the U.S. With less lag payment approvals and a strong appetite from farmers, the opportunity to see faster adoption fits countries like Argentina and Brazil on a different trajectory than we saw in the early days of U.S. penetration.

If we shift over to Soybeans, our focus was establishing Roundup Ready 2 Yield as our platform in U.S. Soybeans, shown on Slide 9. As in Corn, we can definitively say that we've delivered on our 2011 target acre range. With Roundup Ready 2 Yield now gone into its third year of commercial availability, we started from a base of about 6 million acres last year. We saw again a 10 million-acre-plus step up in Soybeans like what we saw in Corn, which lands third-year Roundup Ready 2 Yield at the high end of our target at approximately 17 million acres.

Rapid farmer adoption means today Roundup Ready 2 Yield has clearly achieved the status as our platform in Soybeans. With the increased adoption by farmers reaching mid-teens millions of acres, we've reached the scale where we can effectively move to unconstrained production and availability in the areas that reflect the largest part of our business. With a unique opportunity with only next-generation trait package available -- with the only next-generation trait package available to offer customers the option to upgrade to Roundup Ready 2 Yield and improve their productivity.

In our brands, Roundup Ready 2 Yield represented about half of our volume this year, and we expect that it will step up again next year as it becomes the leading product in the key relative maturities. Also, despite the discounting battle by others in the first generation Roundup Ready, the strong uptake in Roundup Ready 2 Yield allows us to reverse the share erosion trend that we've seen in the past few years, stabilize our brand share and see the opportunity for share growth this year.

This success story gains leverage as Roundup Ready 2 Yield moves into Brazil as a stacked offering. And we crossed a major milestone in Soybeans with the in-country approval of insect-protected Roundup Ready 2 Yield soybeans this year. As happened with Corn, this approval came sooner than we expected, and it puts us on track for a commercial launch in the early part of our fiscal 2013 pending approvals in our key export markets. In fact, we're using this head start in the upcoming season as we'll be doing on-farm trials with some large customers to build their experience ahead of commercialization.

In the interest of time this morning, I won't cover everything on the scorecard but I wanted to share a quick thought on Cotton since the relative contribution has been so positive in 2011. If you go to Slide 10, Cotton is showing real strength this year as the renewal of acres in the U.S. comes at a time when the breeding improvements and the trait commitments that we made when we bought Deltapine are now paying off. While everybody today is watching the terrible drought effect on Texas cotton acres, that appears that overall 2011 U.S. acres will expand, and we expect to grow volume, return to branded share growth and reach the highest penetration in our history of second-generation traits. This, combined with continued growth in India and Australia, allows Cotton to emerge as a quiet start in this year's landscape, as well as an important foundation for our continued success globally.

The one area that we don't touch in our review is the forward look on our expectations in products and price for the 2012 season. On our second quarter call, we spent quite a bit of time on pricing but I think the bottom line outlook may have lost a little bit in translation. The way I think about pricing is captured in Slide 11. We haven't communicated our pricing to our customers yet but as we do, we'll put a big emphasis on new products, whether that's new hybrids, enhancing the lineup, or new technology opportunities like SmartStax and Double PRO RIB. In fact, our product strategy is focused around creating new value for farmers and price lift is an outcome of that new value. We see real pricing opportunity in 2012. This pricing opportunity comes from mix lift, as new products increase the overall average prices in our portfolio, and also from the pass through of the higher costs associated with production. That's a meaningful lift and one that also reflects our interest in continuing the momentum and the positive feedback that we've experienced with our customers that I described earlier in this call.

It also sets up the conversation that we'll begin having with growers very soon as we start thinking about the next season coming in 2012. As we do, I tell you that I feel that we're offering farmers the best lineup of products since we introduced the first biotech traits. The next milestone is the U.S. harvest, and since we don't have a scheduled call event this -- a scheduled field event this year, before our annual Investor Day in November, we're planning our key harvest update for investors in the late summer to share with you the in-season feedback on our product strategy, what harvest conditions look like and our early 2012 positioning.

So if you put all this together, and these factors ultimately show up in our financial guidance, but before I hand it over to Pierre to discuss that, I'd like to share a few final thoughts with you. Importantly, we accomplished what we needed to do this year operationally. The results of this achievement aren't measured solely in share points or in trait acres. It also comes in the form of momentum, and I believe we now have that back again. There's still work to do because this plays out over more than one year and we're committed to work even harder to support the success of our customers, and I like our direction.

What I like about what we saw in 2011 is that our growth wasn't from one source. Our performance speaks to the balance and our strategy. It's more complex than tracking a single-trait introduction but it's contribution for more crops and more products and more geographies and embeds a greater degree of flexibility and opportunity than we've ever enjoyed before. All this culminates in carving out a unique space for Monsanto. And in that space that needs innovation to meet future demand, we continue to be the demonstrative technology leader. And we back that with a business engine that translates innovation into the opportunity for mid-teens annual earnings growth and significant cash flow.

So with that, let me hand the remaining time over to Pierre who can give you some color and how all this translates into our financial outlook. Pierre?

Pierre Courduroux

Thanks, Hugh, and good morning to everybody on the line. Today, I'll put my emphasis on the step up in our earnings and free cash guidance outlook but before I go for the detail, let me step back and summarize my view as CFO on where we are. First, we are seeing the translation of strategy into results, and that gives me confidence that our business is on track. Second, this year we've been able to translate an even greater portion of that business performance into financial growth as we've positioned ourselves very well across our global portfolio. Even off that higher base, I expect we'll again be able to deliver mid-teens earnings growth in 2012, and that speaks to the continuing opportunity. Even in an industry like agriculture where weather and global markets play a role, we have built the business with balance and opportunity, where over time, we believe we can deliver within the range of mid-teens earnings growth.

Let me walk you through how this comes together this year in our results and our financial outlook on Slide 12. For bottom line earnings, we increased ongoing EPS guidance to a range of $2.84 to $2.88 for fiscal year 2011. This new higher range means we expect to deliver growth in the high teens this year. The fact that we've reached high teens growth underscores for me the capability of our core business to deliver meaningful growth and the leverage that comes from operational discipline. As we look at the guidance, the largest contributor to our gross profit growth is our Seeds and Genomics segment. Entering the year, our target range for Seeds and Genomics gross profit positioned us to grow to $660 million over last year.

For the first 9 months, we've already grown by a little more than $500 million, and with that, we've crossed the $4.5 billion mark in absolute gross profit and are already within the range of our total gross profit for all of last year. This is real growth in the business and not timing-related. So it puts us well on track to be at the top end of the $5.1 billion to $5.2 billion gross profit target for the full year. Equally important, we expect the growth trajectory continues in the fourth quarter, with record Seeds and Genomics gross profit growth as our Latin American momentum carries into a new season.

The next guidance contributor is Ag Productivity. Up to this point, Ag Productivity has delivered gross profit of $565 million, which already puts it within our original guidance range for the full year. Our revised earnings guidance for the total company reflects a step up to put Ag Productivity gross profit in the range of $700 million. As Bryan noted, the largest driver of this increase in Ag Productivity related to our initial expectations comes from the lawn-and-garden business. Despite less than ideal spring weather, the lawn-and-garden business is on track for its second largest historical contribution behind the record year of 2010. Supplementing that is some additional gross profit contribution from Roundup related to our initial expectations. For the first 9 months, we remain on track with our original volume target of 250 to 300 million gallons. We've regained significant brand share, and the strength of pricing outside the U.S. is translating to branded pricing at the upper end of our expected $8 to $10 range.

If we move below the line, I'll focus on SG&A. At the beginning of the year, we targeted minimal growth for the fiscal year 2010 in the range of $2.06 billion to $2.16 billion. With the expected step up in second half SG&A costs that we described last quarter, we'd expect to land around the top end of that range. That step up comes from a couple of key factors we identified in Q2. First are the typical seasonal costs that come as we invest in our people and support distribution through incentives and commissions. Second, we are making some incremental investments to support some of the new product launches Hugh described in Latin America. Given that conscious approach to our spending, I'm satisfied that we are making disciplined investments where SG&A supports future growth.

We are also making some incremental investments in our R&D as we accelerate some development work to support those Latin American product launches. We will start some technology development work in South America earlier than we originally planned, which accelerates some of the R&D spends we planned for 2012 into this year. With that incremental investment, I'd anticipate we'll be slightly above the top end of our original R&D projection at around $1.35 billion for the year.

The final factor in our earnings guidance is our tax rate. Year-to-date, our rate is slightly above 29% as we've realized a number of discrete tax benefits beyond our original planning. We now expect this rate to carry forward for the fiscal year and that the tax rate will land in the 29% to 30% range for the year.

If I bring all those elements together, let me tell you how I see the earnings concluding in our final quarter to deliver on our updated guidance, on Slide 13. As we described in our second quarter call, the fourth quarter in 2011 sets up as a larger loss than we've seen over the past couple of years. Specifically, with our ongoing EPS of $3.14 for the first 9 months, we expect a loss of $0.26 to $0.30 in our final quarter.

The most important driver of earnings will be the contribution from our Latin American Seeds business, on Slide 14. I'd highlight that the fourth quarter is the beginning of a new season for both Brazil and Argentina, and with the current momentum, we expect strong growth in the fourth quarter corresponding to the acceleration Hugh described as Brazil and Argentina upgrade the trait mix. Year-over-year, this will be a significant portion of the growth as we expect Seeds and Genomics to deliver more than $150 million in incremental gross profit, which would put us at the top end of our expected GP range.

Ag Productivity is a modest contributor to Q4 earnings, and we expect it to be considerably less than it has been for the past several years now that the Roundup portion of the segment is at a lower steady state level. So even with the record Q4 Seeds and Genomics contribution, I expect the decline in Ag Productivity to drive slightly lower total company gross profit in the fourth quarter versus last year. That overall GP contribution is not expected to offset the full load of SG&A and R&D spend I described. With the incremental investments we're making in both categories, we expect those expense lines to reach the quarterly peaks for the year. The Q4 run rate for SG&A should continue the step up we saw in Q3 and our R&D expense should track similar to the rate we recorded this quarter. Taken together, those expenses are expected to drive the larger loss we see in the fourth quarter this year.

However, as we look into the future, the continued growth in Latin America should outpace spending growth. So the Q4 loss should come down from this year's farms.

The last piece I'll cover is the outlook for free cash flow on Slide 15. With the strong cash generation we've seen to date, we've raised our free cash expectation for the second time this year, now projecting the range of $1.1 billion to $1.3 billion. This increase in free cash flow reflects the increase in net income that drives our revised earnings guidance, as well as the conscious effort we've put behind working capital management as we focus on disciplined growth. The importance of converting earnings into cash, while maintaining a strong balance sheet, is one of my fundamental priorities. It is our cash that allows us to invest in the business for growth and return value to shareowners. And that's how we'll continue to look at cash deployments. For example, for the third quarter, we've used a total of $938 million on dividends and share buybacks. This is already roughly 3 quarters of our new projected cash flow guidance directly returned to our owners.

Let me conclude by stepping back from the numbers for a moment. I'd summarize by telling you that the importance of our improved outlook does 2 things. First, it is the punctuation mark that validates we're on track to come in above the financial guidance we laid out at the beginning of the year. And that tells me we have the right strategy in place, we've put the right emphasis on the operational discipline to execute on that strategy and we've been able to translate plans into results.

Second, it's the first look at what we expect for next year. From this point, we've just established a higher base. It is still early to set guidance for 2012 but with the business engine we have in place, and the discipline we've demonstrated this year, I am confident we can carry our mid-teens growth expectations into 2012.

With that, let me turn it back to Bryan for the question period.

Bryan Hurley

Thanks, Pierre. We'd now like to open the call for questions. [Operator Instructions] With that, Rob, I think we're ready to take questions from the line.

Question-and-Answer Session

Operator

Our first question is from the line of Mark Connelly of CLSA.

Mark Connelly - Credit Agricole Securities (USA) Inc.

First, if you could tell us you've got the shift in R&D from Latin America. Can you give us a sense of how R&D is going to break out in 2012 and over the next couple of years between Seeds and Traits and breeding after the big bump you made up in breeding in the last couple of years?

Hugh Grant

Yes. I don't think -- Mark, I don't think we've projected that but a rough rule of thumb here, it's roughly 50/50 between the breeding and the biotech piece. And I think the interesting thing and we've kind of organized around this, we see an increasing blur between biotech and breeding. There's a lot of interchange between those 2 groups. And then the other piece in Latin America, I don't know, Pierre, I think that the main emphasis in shift in spend there is really pre-launch.

Pierre Courduroux

Yes. I think what -- important to notice and that's also one of the drivers of our Q4 is that, I mean, thanks to the earlier than anticipated in registrations we got in Latin America, we've been pulling forward some of our expense into 2012 to be ready to start our field trial work almost a year in advance so that's one of the key things we see right now.

Operator

Our next question is from the line of Don Carson of Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP

I want to talk about Corn growth going forward, specifically the Reduced-Refuge family. Hugh, you mentioned you grew about 10 million acres this year. Can we expect similar growth next year or could it accelerate? Because I know you were somewhat limited in your availability of VT Double PRO and I would expect that to accelerate as you get into 2012. So just a comment on the trajectory of growth for the Corn portfolio in 2012.

Hugh Grant

Don, thanks for your question. So as we look forward, we will continue and we built this strategy this year premised on volume growth and as we look at the coming year, that will be the continued premise and as we laid out this strategy, we built it on a 2011, 2012, 2013 view. So this is the ground floor on a 3-story building. So we'll look for volume growth next year. We could have sold more this year in some of our products so we'll be ramping on Double PRO, we'll be ramping on Triple PRO, we've organized around SmartStax to the north. And I think from all the grower feedback, I think the Reduced-Refuge -- there's a lot enthusiasm around the Reduced-Refuge product. So getting the regulatory approval on Double PRO, I think, is going to be -- you can never call it until it's there but that's going to be a big deal for us. So we're going to continue to hold the line on pricing and drive volume growth from where we see.

Donald Carson - Susquehanna Financial Group, LLLP

And the RIB Complete is the plan to have all your SmartStax in RIB Complete and assuming you get that permission for Double PRO to sort of totally convert the portfolio to RIB Complete?

Hugh Grant

Yes, that's absolutely right. So it's -- we've been retrofitting plants in advance -- production plants in advance. So our intention would be to make that Complete switch across the Reduced-Refuge portfolio.

Operator

Our next question is from the line of Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley

A little bit of a follow-up on Don's question but from your comments, if you did 13 million in Reduced-Refuge, is it reasonable to assume that SmartStax within that is at least in line with what the Triple stack did in year 2, which was 6 million acres? And then going one step further, the Triple stack in year 3 did 18 million. Is there any reason to believe that the trajectory of SmartStax in year 3, particularly with RIB Complete, would not follow along something similar to what the Triple stack did?

Hugh Grant

So -- Vincent, thanks for the question. As you know, we haven't dissected out the components of that 13 million. And the rationale for that is I think it delivers a playbook in advance to our competitors. But if you look at trajectory of growth, I think the telling number is when Triples peaked out at 31 million and you take a Reduced-Refuge family plus Triples today and we're now at 37 million, the product ladder, I think it's expanded choice for growers. It's introduced a wider spread at price points. And I think what we're seeing is SmartStax's naturally migrating to the shorter season northern segment where we've got much more hybrids. And in Illinois, South Central Illinois, will see our Triple PRO, triple mix and building out there. And frankly, if we'd had more, we would have sold more this year in those segments. So we're taking that into account for our production in this coming year.

Operator

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

P.J. Juvekar - Citigroup Inc

Yes. I'm looking at your Slide 11 and it seems like germplasm upgrade gives you a pricing lift of about 5% a year. So when you offer RIB, which is neither new trades or germplasm, how do you see that for pricing, would that be offered at a premium because of the convenience?

Hugh Grant

Yes. P.J., thanks for the question. So a couple of points, and I'll maybe ask Pierre to add something to this but very briefly, you're right, when we look at germplasm, about 20% to 25% of our base Seed offering in Corn -- so the hybrids, the germplasm -- turns over every year. And if you look at the price spread in any given year between our brand-new hybrids and the exiting hybrids, the price spread is 30% plus. So that's about 30% spread between our new hybrids, which always sell out, and the exiting hybrids. And if you look at that average over the entire portfolio, to your point, that represents about 5% to 7% price increase in any given year. And farmers will happily pay that because those are the best performing hybrids. When you look at RIB pricing, in the last 6 months, we were saying there's 2 options: we either give away RIB and use it as a share driver or reprice RIB fully against the convenience and performance that it represents to the grower. And I think we are erring somewhere in the middle between those 2. And as you see RIB price on a bag of seed, it'll be an embedded price within the overall bag. We won't break out a separate line for RIB. But as I mentioned in my earlier comments that there's a ton of interest out there because RIB changes the game and how they farm, it allows them, with the same amount of manpower to farm more acres than in a really wet year like this one. And allowed them to get operations -- it would have allowed them to get the operations done in a more timely manner. But we have -- we're going to take out a moderate pricing approach and allow farmers to benefit experience and the technology. Pierre, if you can add anything?

Pierre Courduroux

Yes, I mean, what I like about our pricing strategy right now, I think it touches on all the confidence of gross profit potentially because we give farmers the choice in between a range of Reduced-Refuge family products. So from there, I mean, we've got a mix of great opportunity and then RIB would be a driver of that. We've got a volume opportunity and Double PRO would be potentially a driver of that. And obviously, we've got fuel price. So I think the choice we give to farmers optimizes our potential for growth next year. So I feel really good about, I mean, the way we've positioned ourselves right now.

P.J. Juvekar - Citigroup Inc

And so you -- do you think you have won back enough goodwill from growers that you can look at some pricing through this again next year?

Hugh Grant

Say it again, P.J.

P.J. Juvekar - Citigroup Inc

Do you think you have won back enough goodwill from growers, if you can look at raising prices again?

Hugh Grant

Sorry, I don't think about it like that. I don't think about it as trait and goodwill against runway and price. I think what we've done in this last year -- I think it's interesting because we made the strategy shift only in the U.S. and predominantly in Corn in the U.S. It was a product strategy shift and we spent -- and personally I've done a lot of this -- we spent a lot of time getting back to the basics and listening to growers. We've gained high marks based on our research on responding to that grower feedback. And as I think about -- the earlier question about '11, '12 and '13, the goodwill that we're generating with growers, we've been talking about the 3-year strategy on this and how we continue to drive on our side, volume growth, on their side, improved choice. And that choice will show up in a range of technology offering and a segmented price dependent on where they play in that product ladder. So I don't -- I think it's going to take a couple of years but I think this year's -- this is really the close-out quarter for us, P.J. And I feel very good in the first year of this. You make changes in the strategy in one year but you execute over 3 or 4. So this is the first chapter.

Operator

Our next question is coming from the line of Laurence Alexander, Jefferies & Company.

Laurence Alexander - Jefferies & Company, Inc.

I guess you've just to piece out with one more question about your pricing philosophy. As you look farther out at the traits in your pipeline, do you see any that you feel comfortable already can give you a significantly higher rung in the ladder as opposed to just pricing for penetration?

Hugh Grant

Yes, it's a tricky -- let me try it this way. We think that in the long run, the value share between the incremental bushels that we create, between that 1/3 to 2/3 split with the grower is a good rule of thumb. And there's no new acres in the planet. So the focus increasingly is how do you unlock new bushels. And the grower's kind of agnostic, whether that comes from an improved trait or improved genetics. He's just looking for what comes over that yield monitor. So as we look forward, I think a piece of this is going to be continuing to improve the genetics and how we morph between biotech and the genetics and the investment there. The other one, I think, is continuing to drive better bug and weed control and then unlocking some of these yield traits and I -- you're going to see the next wave for that, I think, in soybeans, which for 10 years has been a little bit slower than corn but we're beginning -- I think, with what we've done this year with the new platform, you begin to see cause for hope for Roundup Ready 2 Yield. So I don't think it's any one silver bullet in this but you have to satisfy the growers' demand for driving yield. I think, it's about as fundamental as that.

Operator

Our next question is from the line of Michael Cox with Piper Jaffray.

Michael Cox - Piper Jaffray Companies

My question is on the glyphosate side of the business. Considering the success you've had this season and as you indicated the higher end of your pricing range, what are your thoughts on pricing action as you look ahead to next year?

Hugh Grant

Yes. It's still early but philosophically, as we think ahead, we will continue to focus on competing directly with generic material. And I would anticipate that we will lay our Roundup pricing pretty much right on top of where we see generics. We are still early days, still early days for that but we're going to keep a vigilant eye on generic material and we will compete directly with that. And that's kind of to my earlier point, when you lay out one of these strategies, you can't change course every year. So that was the strategy we laid out last year and I anticipate we'll continue to execute that through the coming seasons. And I'll tell you, it's early days but we've seen a nice rebound in brand share and -- albeit at very different price points, but nice rebound in brand share and good feedback from growers.

Operator

Our next question is from the line of Kevin McCarthy of Bank of America.

Kevin McCarthy

Yes, based on your commentary, you seemed pleased with the Roundup Ready 2 Yield soybean sales results this year, and yet if I look at the commentary on Slide 6, your scorecard, you seem to stop short of endorsing market share growth there. Can you comment on what's transpired on first generation Roundup Ready soybeans and implications for where your share may have trended in the U.S. market this season?

Hugh Grant

Kevin, thanks for the question. I think as we look across the board this year, it's always one of these awkward things that tomorrow morning the crop report comes out and we got another snapshot and clarity on how big the U.S. plantings have been. So there's always a bit of reticence on guessing that the day before but -- so if you take the caveat of uncertainty of acres and you take the caveat on likelihood of higher returns given a wet spring, as I look across our key crops, I feel good about share growth in each of these, so in beans, corn and in cotton. The interesting thing in beans is the kind of yin and yang because a tremendous progress on Roundup Ready 2 Yield but a price fight in the market on Roundup Ready 1 and the older technology. And you see some counterbalance between those 2 but if you look at to your specific question, if you look at beans overall, this was a transitional year for us and we -- after 3 years with 17 million acres, we built a platform.

Kevin McCarthy

Just to follow up, Hugh, what is the magnitude of the price pressure on Roundup Ready 1?

Hugh Grant

So this is real rough and it's going to be all over the country but from a marketing point of view, the interest and insight, I think, is you see -- if you look at the spread between 2s and 1s and what the farmer's paying, there is probably -- the discount involved, it's probably about a 10% spread between the old technology and the new. And that, again, that varies by market segment.

Operator

Our next question is from the line of Jeff Zekauskas with JPMorgan.

Jeffrey Zekauskas - JP Morgan Chase & Co

If I can try to translate your qualitative -- I'm sorry, your qualitative commentary on Corn and Soy share in the United States this year, into quantitative terms, is it that you think that you've gained about a point of share in Corn and your Soy share change is about 0?

Hugh Grant

No. Jeff, thanks for the question. To all the previous caveats and who knows how big the market is. If you were -- if I was guessing this today, I'm guessing and both these crops is around a point. We'll be wise if they are above [ph] -- I think, and Corn and Soy is probably around a point of share gain. And in Cotton, it would be several points. It's been a significant -- we saw, not just in the U.S. but we saw in Australia and in India real strength in the market. But if you look in the U.S., we saw the effects of breeding and technology really coming together in our Deltapine business. Here's the significant piece, if you look at Corn and you look at that point, it's organic growth. It's not acquired, it's not bought, it's not bolted on. It's organic growth. And I think that's a nice temperature check on a new product strategy.

Jeffrey Zekauskas - JP Morgan Chase & Co

And then lastly, in terms of the SEC investigation into Roundup or glyphosate incentives, do these incentives tie glyphosate to Seeds? Or are these incentives located solely in the glyphosate or Roundup sector?

Hugh Grant

Yes. They're -- it's the latter. So there's no tie to our Seed business, Jeff.

Operator

our next question is from the line of Duffy Fischer with Barclays Capital.

Duffy Fischer - ClearBridge Advisors

If we could go to the Seeds and Traits business, in the quarter, you actually grew gross profit more than you grew sales so your incremental margins were more than 100%. And that's at a time that the underlying seed price, with your contract farmers should have been going up as the crops themselves were going up. So can you walk through the benefit buckets of how you were actually able to grow gross profit more than sales when at least some of the COGS had some upward pressure on it?

Hugh Grant

Let me ask Pierre to cover that.

Pierre Courduroux

Yes. So, Duffy, when you look at cost of goods, I mean, based on our production cycle, based on the way as well where we hedge our cost of goods, I mean our grower contracts, basically. Actually, the impact of the commodity price raising doesn't have direct translation into the quarterly earnings. I mean that's part of the way we run our business. Actually, I think that we talked about that during the last call, I mean, we have a hedging strategy that covers that the production cycle from one year to the other. So it is no surprise. You don't see that reflected during the quarter. So regarding the upside you see in the Seeds and Traits margin, so definitely, I mean, Soy would be one of the big drivers where we've seen a great improvement into our margin, and it's a factor of combination of things. So one would be the success of our Roundup Ready platform. And as Hugh was saying, the fact that we chose not to participate into some of the Roundup Ready 1 fight in terms of pricing, so definitely having a positive impact on our margins. The second one is, this year, actually, we enjoyed a very favorable cost of goods in Soy, actually. So we enjoyed very nice cost of goods in Soy. And then still in Soy, there is an element that may be lost and, I mean, our business is a global business and the Brazil POD, actually this year, is having a very, very nice impact on our earnings and POD is basically, I mean, pure margin. So that's also very nice. So obviously this one is depending on commodity price, it's depending on yield, on acre planted. But this is one of the key drivers we've seen into our margins. So I hope it helps you think about that.

Duffy Fischer - ClearBridge Advisors

Okay. And then just, Hugh, on the comments you have been making relative to corn seed, either market share or volume growth, I'm assuming that excluding the Holden's business, and what would those numbers or commentary be like if you lumped everything together so the Holden's plus your branded business?

Hugh Grant

Yes, Duffy, you're right. That does exclude Holden's and I don't think we've done a break out of Holden's yet. Bryan, I don't think...

Bryan Hurley

Yes. I think just too early in the season given that they report to us later in the season.

Hugh Grant

They're usually the last piece in, Duffy.

Duffy Fischer - ClearBridge Advisors

Okay. But is it fair to assume that, that's maybe where some of the share gain is coming from, is from those guys?

Bryan Hurley

I would say it's probably still too early to tell just because we literally don't have that data yet.

Operator

Our next question is from Michael Picken of Cleveland Research Company.

Michael Picken - Cleveland Research Company

I was just wondering if you could talk a little bit, we've been hearing about some insect pressure a little bit in the Midwest and a lot more than maybe last year. Could you talk about as you think about how you're going to market sort of the Reduced-Refuge family, how much of it is going to be based on its ability to combat insect pressure versus the convenience factor of RIB as you sort of take the product to market for next year?

Hugh Grant

Great question. So a super wet spring, still early. You're beginning to see the first rumblings on bug counts because they don't like wet springs, nobody does but -- so early indications are, populations took a bit of a ding. I'm encouraged if you step back and you say despite that what the farmers do, you see -- my point earlier on Triples, if you look at the peak on Triples at 31 million acres and then you look at Triples plus Reduced-Refuge now at 37 million. I think that speaks volumes on how growers are thinking about this. Particularly with commodity prices where they are, even moderate infestations, they're not going to risk losing a bushel. So that's the first point. The second point is with this new product strategy, with the ladder in there, they can dial in the product that they want to use relative to the infestations that they anticipate on their farm. And then the last point, I think, is really where you were starting, which is the convenience in this, in a wet spring, the convenience if you're struggling with manpower on eliminating that refuge, on taking down the number of operations that you -- the number of patsies [ph] on that field. Even in a light bug infestation, that's a great time saver and timely cost leverage and efficiency. So we'll be positioned in this obviously on bug control but also on the leverage of just pure convenience.

Michael Picken - Cleveland Research Company

Great. And then one other question. Just as we think about the cotton market, you sort of indicated you got several points. Obviously, Texas has had some issues with the drought and whatnot. I mean, what market is there specifically that you're gaining the most share in? Is it in that Texas area or is it back in sort of the delta Southeast area where maybe the Triple Nickel was historically really popular? If you could just give a little more color in terms of where you're picking up that share?

Hugh Grant

Yes. We've seen probably the biggest shift in the mid-South. I mean, you're right. Texas has gone through an absolutely dreadful year and growers have really suffered in that market. But for us, it's been the mid-South and we've been talking for 2 seasons now about some of the new varieties and how they had the capacity to supplant that Triple Nickel. And that's really playing out in the field. The feedback from growers has been phenomenal. And when you see share shift in cotton, it happens in larger increments than in corn. So what we're seeing is nice traction in those markets.

Bryan Hurley

Rob, this is Bryan. I'm conscious that we're running up against the hour. So maybe if we could take one more question, and then give just a minute for Hugh to wrap things up.

Operator

Sure, Mr. Hurley. Our next question is from James Sheehan of Deutsche Bank.

James Sheehan - Deutsche Bank AG

Could you just explain if you can, why the investigation on glyphosate is in the SEC rather than the U.S. Department of Justice or some other agency? And what would you see as potential downside risk there? Would the penalty be fines or reimbursement of customers, or what would you see as a remedy if there was misconduct?

Hugh Grant

Thanks for the question. I think, out of respect for the SEC and their processes, there is really not a great deal that I can say at the moment. It's focused on glyphosate, it's focused on our customer incentives, and it's focused on the 2009, 2010 time frame. And we're -- it's early days but we'll just start to document production and we're cooperating to our full ability. But beyond that, I don't think there's a great deal I can say at this stage.

So let me just quickly wrap up. I know we're a little bit tight in time, and I will be brief. But I did want to reiterate that the third quarter for us is really the turning point before we start shifting our attention to 2012. And in a lot of ways, we'll be living in our new year and our next fiscal year, well before this growing season is too far along. So as we start that looking at 2012, as we use this quarter as the punctuation mark of the close out for this year, let me just summarize my thoughts about this year and beyond. First, I feel really good about 2011. This was an important year for us in many ways. It was an important year to demonstrate that we've the strategy right, and more importantly, we can deliver on that strategy. And I believe we've done that. I feel equally good about '12. I think about '11 as a starting point as we play into '12 and beyond that, into '13. And with what we've accomplished this year, I believe that our engines are in place to continue that momentum into the next season. And finally, that speaks to the continued opportunity that we see in a world that's increasingly going to need greater productivity on every acre everywhere the agriculture is conducted in the world. And we're a company that can deliver better technology in a way that positions us well for balance, consistent mid-teens earnings growth going forward. So thanks for your attention this morning. Thanks for your support. And I wish you all the best over the coming holiday weekend.

Operator

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

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