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Executives

Bryan Hurley - Director of Investor Relations

Pierre Courduroux - Chief Financial Officer and Senior Vice President

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

Analysts

Vincent Andrews - Morgan Stanley, Research Division

James Sheehan - Deutsche Bank AG, Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

P.J. Juvekar - Citigroup Inc, Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Michael Picken - Cleveland Research Company

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Michael E. Cox - Piper Jaffray Companies, Research Division

Monsanto (MON) Q2 2012 Earnings Call April 4, 2012 9:30 AM ET

Operator

Greetings. Welcome to the Second Quarter 2012 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

Thanks, Rob. And good morning to everyone on the line. Thanks for joining Monsanto's second quarter earnings conference call. I'm joined this morning by Hugh Grant, our Chairman and CEO; and Pierre Courduroux, our CFO. Also joining me are Manny Cruz and Bryan Corkal, 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 both on a GAAP basis and on an ongoing business basis. Where we refer to non-GAAP financial measures, we reconcile to GAAP in the slides and in the press release, both of which are posted to our 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 may vary in a material way from those expressed or implied in any forward-looking statements. A description of the factors that may cause such a variance is included in the Safe Harbor language in our most recent 10-K and in today's press release.

Today's conference call revolves around the results that confirm the momentum in our U.S. business in the second quarter and the step-up those results create for Monsanto's full year earnings and free cash flow outlook, as we've raised our guidance above the high end of our initial ranges for each. Given that, I'll let Pierre walk you through our financial results to give you the context of our strong 2012. Then Hugh will take a deeper look at where we stand in our overall strategy and how we see the layers of growth building from where we are today.

Pierre Courduroux

Thanks, Bryan. And good morning to everybody on the line. The second quarter was a record quarter for Monsanto. But more importantly, it provides the evidence of our business strength and creates the confidence we have in our full year performance as we increase our guidance expectations. So today, I will build by review around the step-up in our full year earnings and free cash guidance on Slide 4.

We raised our ongoing EPS expectations above the high end of our initial guidance to $3.49 to $3.54 per share. We also raised our free cash outlook to $1.6 billion to $1.8 million, also above the high end of our initial range. This is a significant step-up that confirms that the momentum we saw in the business has translated into financial results.

And before I go through the details, let me emphasize a couple of points. First, the completion of this quarter gives us the data points to confirm the strength we anticipated in our U.S. business. During this quarter, we've seen the translation of early indicators, like the strong order book and deferred revenues, into our financials. Second, with a record second quarter, we have an early punctuation mark on what we see as a great year. The strong showing in the U.S. builds nicely on the growth from our Latin American business. In just 2 quarters, it's clear we're delivering on our expectations of greater international growth, more balance across our businesses and continued expansion of our U.S. base. In fact, with the strong U.S. performance, we now see the U.S. becoming the largest contributor to our overall growth for the year. But it is nicely complemented by the strong and expected growth from our international business. Most importantly, if you take all of that together, we now expect to deliver ongoing earnings growth in the range of the high-teens this year, and that speaks to the great overall year we see in 2012.

If we now go to Slide 5, I will walk you through our financial results and give you the context for our increased guidance. For the quarter, ongoing earnings per share were $2.28 compared with $1.87 in prior year, an increase of more than 20%. That performance makes this second quarter a record in terms of ongoing EPS, as well as total sales and gross profit in our important Seeds and Genomics segment. That record quarter means that the second quarter will be our most significant earnings driver this year, and in turn, it changes the seasonality of our earnings flow in 2012. Given the combination of the absolute growth in our business, the early strong demand in the U.S. and a couple of timing benefits, the first half results largely capture the growth we expect to reach in our full year guidance. This has a practical effect on our full year earnings pattern as the stronger first half performance and timing shift also means that we expect overall earnings for the second half of the year to be effectively flat when compared with last year.

And the best way to see how all of that plays into our increased full year guidance is to build off the business drivers and key factors in our first half performance. This -- the clear place to start from it, clearly Seeds and Genomics. In this critical quarter for the U.S. and for our seeds business, Seeds and Genomics gross profit grew by approximately 17%. Year-to-date, Seeds and Genomics gross profit is also up by double digits, reaffirming it as the central driver of our growth in 2012.

The biggest driver of that growth is our corn business, where gross profit is up by more than 20% in the quarter. With the second quarter driven by the U.S., we are very happy with the strength that we see in our North American corn business this year. Our growth strategy is on track and delivering. and Hugh will spend a little more time with the specific milestones here. If you combine that U.S. strength with the step-up we saw in Latin America, our corn seeds and traits gross profit is up 29% year-to-date. And we've also seen the margin expansion we expected in corn, with the improvement of 3 points at this point in the year reflecting the financial benefit we get as the strategy to upgrade our mix and provide greater value on each acre is realized. Corn is clearly a core driver for us, both this year and in future years. So the validation of our strategy for earnings underscores the ongoing opportunity we see.

Now this performance also reflects the practical reality that there's been strong acreage growth in nearly all the key corn geographies this year. This is not the critical factor in our earnings in any year, but that acreage growth provides a tailwind that we were all well positioned to capture and translate to financial results.

In addition to our strong corn results in the quarter, we see continued positive gross profit contributions from our cotton and soybean businesses. For the quarter, soybeans are the most meaningful contributor of the 2 as the financials start to reflect the contribution from the U.S. season. And the first half uptick is really a function of the positive mix effect occurring as we step up to our Roundup Ready 2 Yield platform in the U.S. This is another important strategy driver Hugh will cover. But from a mix standpoint, our U.S. soybean contribution is squarely where we want it to be.

As we told you coming into the year, our Brazilian soybean business had a record year in 2011 because of the historically high revenue from our point-of-delivery royalty system, which reflected the strong yields and healthy commodity prices we saw last year. We don't expect those conditions to repeat in 2012, so the overall contribution from Brazil soybeans will be smaller this year, which will also be reflected in the second half. As we've indicated, as the Brazil contribution normalizes, we expect total soybean GP to be flat to slightly down year-over-year and for margins to pull back from those 2011 levels.

The strong first half in corn, soybeans and cotton was partly offset by our vegetable business, where the second quarter continued the trend we saw in the first quarter. And there's really 2 factors at play. One relates to the market conditions in Europe and the other is the result of an operational decision. We've seen reduced sales in the EU, where economic conditions reduced demand for our higher-end vegetables and have limited customers' access to credit. We've also completed an extensive review of our vegetable portfolio, writing off some of our existing inventory, which we believe will also help enable our vegetable growth strategy as we move to fresher inventory over time.

With all of that, we expect the first half loss to moderate in the second half and total vegetable GP to be down some for the full year but transitioning back to growth in 2013. Vegetables continue to be one of our core crop platforms and a source of growth in the coming years. In fact, on the technology side, we're advancing more products into launch preparation than we have seen since we got into the vegetable business. And this validates the commercial opportunity we see from new products coming from our molecular breeding pipeline.

The last point to make regarding our first half business performance relates to a couple of timing elements that mostly impact the U.S. and result in earnings flowing through the income statement earlier than in some prior years. Most notably, with the warm winter and strong demand for our products, things are set up to translate to an earlier-than-typical spring. For us, it means that with mild weather around our warehouses, we've been able to ship more seeds than last year.

Additionally, we have some first half timing benefits coming from our licensing business. As in our branded business, we see the benefit from the earlier spring as licensee volume is also shipping earlier in the season. In addition, over the past couple of years, we've gotten better visibility on in-season forecasts for licensee sales. So taken together, those 2 factors mean that compared with prior years, more of the annual royalty revenue has shifted from the second half of the year into the first half.

When I bring all those elements together, it underscores the underlying growth that drove our first half results. The combination of growth in our core business in the U.S. and internationally, our ability to take advantage of the momentum afforded by our strategy and the practical realization of some benefits -- all of that positions us very well for 2012.

It also provides the context for how we see these results translating to the step-up in our full year guidance on Slide 6. As you would expect, based on the first half results, the step-up in our ongoing EPS guidance flows directly from our Seeds and Genomics segment. Entering the year, our target range for Seeds and Genomics gross profit positioned us to grow approximately $500 million over last year. Through the first half of the year, our growth is effectively in that range. So as we step up our ongoing EPS guidance, we've also made a step-up in our gross profit expectations for Seeds and Genomics, which we now project to be higher, in a range between $5.85 billion and $5.9 billion.

The next category to look at is ag productivity. I didn't spend any time on ag productivity in the financial review, but it continues to track close to our initial expectations, delivering gross profit of $394 million through the first half. The biggest driver in that performance comes from the Roundup business. Building on the success we had with the weed management strategy in 2011, Roundup is in a good position this fiscal year. Our prices continue at a small premium to the generics, and we are seeing strong volume and the mix benefit with more branded Roundup this year. With that Roundup strategy working well and with contribution from our selective and lawn-and-garden businesses, we are tracking toward a slight upside to our initial guidance for the segment and expect to generate between $800 million and $825 million in total GP for the segment for the full year.

Moving below the line. Our expenses to date are largely tracking with the increases we'd expect as we grow the business. We continue to expect to be in the guidance range we laid out for SG&A and R&D spending. Although with a step-up in our business results, we'd expect to likely land at the higher end of our ranges for the full year.

Let me now wrap up with the other aspect of our increased guidance, which is the increase in our free cash flow outlook to $1.6 million to $1.8 billion. As you'd expect, the stronger business results are translating from earnings into cash, but we are also seeing the benefit of a strong ag environment via our collections, as well as the continued benefit from our working capital management. For the first half of the year, we have generated free cash flow of $1.3 billion, which is a step-up of $353 million from the $917 million we generated in the first half of 2011.

Converting earnings into cash remains a priority, and I'm very pleased with our performance this year. This creates the means to invest in the business for growth, and Hugh will mention some of the areas we're looking to emphasize. It also allows us to prioritize the value we can return to shareowners. In this quarter, we've used $273 million for share buybacks, which now puts us more than 80% through our $1-billion share buyback program. And for the first half of the year, we've used a total of $621 million on dividends and share buybacks, or almost 40% of our new projected full year free cash flow that we directly returned to owners.

Let me conclude by stepping back from the numbers for the moment, and I'll make 2 key points. First, when you deliver a record quarter like our second quarter, the momentum and the strength in the business becomes apparent. At the beginning of the year, we said our business was going to be more balanced and include more growth from global areas that complement expansion in the U.S. With the Latin American results and the confirmation in the U.S., we've seen all of that in just 2 quarters and that is driving the growth we expected in 2012. Second, the second quarter is an early punctuation mark on a great year financially. Our business strategy is strong, and most importantly, we are translating that to financial results. And that's why we feel confident in stepping up our full year guidance, as we expect ongoing earnings growth in 2012 in the range of the high-teens, confirming for us even at this relatively early point that 2012 should be another strong year.

With that, let me turn the time over to Hugh for the look at our strategy at this point.

Hugh Grant

Thank you, Pierre. And good morning to everybody joining us on the call. We've talked about momentum for some time. With the results of our core U.S. business in hand, I think we can say that momentum was more than a 1-year uptick in 2011, and it really reflects the cadence of sustained opportunity and growth, both in the U.S. and internationally.

I'd make 3 points. Number one, this momentum is important. We're getting to the outlook for 2013 in the third quarter, so I won't get ahead of that today. But last year was a very good year for our business, and we see that strength continuing in 2012. With back-to-back solid years, our strategy is on track, and that allows us to look into 2013 with more confidence.

Number two, we see layers of growth. It used to be easy to identify us with a single product and a single geography. But as our business expands, we see multiple layers of growth over multiple areas and coming in over multiple time periods. That's important because we'll build on our existing momentum as we grow into a more global, balanced business. That also means that we don't just rise and fall with the cycles but we have growth opportunity that's rooted in real strategic drivers.

And finally, number three, within those layers, there are entirely new categories of opportunity that enable growth. We're consciously leveraging our unique R&D and commercial advantages in totally new areas where we can build new platforms. The second quarter is an ideal point to measure our progress against those layers of growth. It's a data-rich period where we see some of the key indicators of the strategy playing out.

So the place to begin is the U.S. on Slide 7. On a macro level, U.S. agriculture definitely reflects the strong demand-driven opportunity. And as we calibrate our business success against that environment, it's very clear that the U.S. is delivering again this year. The proof is in our U.S. volume and mix. We took a huge step forward last year, and I'm pleased to say that, that's continuing in 2012. We're seeing significant volume growth and a step change in the mix upgrades. Just as importantly, coming out of the 2011 harvest, we saw some of our strongest yield advantages ever. So I'm pleased that those differential advantages on last year's yield monitors are translating to greater opportunity this year. I'm also particularly gratified to see the validation of a couple of years of heavy lifting, as we made the conscious effort to address product choices and pricing to better connect with our farmer customers.

With the translation of orders to shipments, we see a significant step-up in unit volume growth. Specifically, we're on track for an increase in total U.S. branded seed volume. And if we focus further on cotton seed, the trend that we set last year is continuing. In 2011, our branded cotton volume grew by the largest increment in the last 3 years, and that translated to organic share growth. We're building on that success in 2012 as we project another significant step-up in cotton unit volume. And while the ultimate planted acres are still speculative at this point, we're confident on our volume growth in cotton is strong and we expect it to translate to organic share growth again. In particular, in a year where cotton seed supply has been in focus, with the majority of shipments already out and our seed effectively back from South American production, we continue to be in a good position with our seed availability to meet the overall market opportunity.

The other measure is mix on Slide 8. We now have the sales on hand to give us confidence that we'll see step-ups of more than 10 million additional acres again this year, in both our Reduced Refuge Family in corn and Genuity Roundup Ready 2 Yield in soybeans. 2011 was a breakout year for both of these platforms, and the ability to step that up once again in 2012 speaks to how far these platforms have come and how well they've shown up at harvest time. In fact, with the strength in the U.S. corn market, we expect to be at the high end of our 22 million to 24 million acre target in the Reduced Refuge corn family. This certainly reflects the good response to the rollout and the ramp-up of RIB Complete for Genuity SmartStax and VT Double PRO this year.

Within that, the demand for our rootworm traits in particular has been strong this year. As I mentioned in the first quarter, we take issues of rootworm hotspots in the corn and cotton areas seriously, and we've worked to be proactive in this area. It's an environment where we should expect the noise around rootworm hotspots to continue to make headlines. I also believe that farmers see the practical benefits. That's evidenced by the strong sales this year, but also shows up in the demand beyond 2012 as we step up the weight of SmartStax and Triple PRO in our portfolio with the growth of our Reduced Refuge Family.

Similarly, the widely recognized performance of Roundup Ready 2 Yield soybeans has really spurred strong demand. In 2011, Roundup Ready 2 Yield sales capitalized on the harvest buzz around its strong yield performance. With back-to-back solid harvest results, that same trend continues in 2012. We expect to step up at least an additional 10 million acres this year, as we're on track for our 27-million to 30-million-acre target even though total planted soybean acres are likely to be a little lower than last year. Strategically, Roundup Ready 2 Yield represents more than 3/4 of our branded offering this year, so the conversion is really in full swing.

That trait upgrade complements the mix benefit that we're seeing in our germplasm portfolios as well. We're well on track to see the annual portfolio upgrade of our corn germplasm, which also means that we're tracking very well against the portfolio price mix expectations that we had entering the season. With an annual upgrade and a massive market like the U.S., there's a built-in increment of growth that comes as better breeding drives better yield performance and new higher-value seeds for farmers.

Additionally, I recognize the intensity of annual interest in the ultimate mix of planted acres this year, especially in light of last week's USDA report. In the U.S., because of the balance in our business, there's only a minimal earnings difference as acres move between crops as shown on Slide 9. Given what we shipped and our overall mix, I'm comfortable that however the planted acres land, we'll have overall growth across our U.S. business.

Before we leave the U.S., I'll make one final point of punctuation. With the success that we had in 2011 and the strong first half in 2012, the U.S. continues to be a big opportunity for us as one where each and every one of our growth factors is playing out. You have the mix upgrades in traits and germplasm, you see continuing volume growth and you see pipeline products expected to build further from here. It's a compelling opportunity that we see holding growth potential for the rest of this decade.

As we move on to additional layers, we've described 2012 as a year where we're going to see growth from our international businesses. There's no better example of that than the emergence of the corn opportunity in Latin America, shown on Slide 10. This Latin American story was the centerpiece of our results in Q1, so I won't belabor the point. But since it's such an important strategic driver, I'd emphasize 2 points:

First, in the broad view, we're only on the front edge of trait penetration in Latin America. In Brazil, our growth this year was primarily driven on just initial trait penetration and the first upgrade from first- to second-generation traits. We still have the opportunity of the full upgrade to double stacks and other multi-trait stacks. So for traits alone, we expect that this is a runway that carries out over the next half a decade.

Second, if you layer that trait penetration with the same germplasm portfolio upgrade that I described in the U.S., then we're seeing the compounding effect of trait penetration, volume growth and pricing upgrades. In fact, in places like Brazil, with the rapid upgrades underway, the portfolio turnover rate is currently exceeding that of the U.S., which we show on Slide 11. Those are incremental upgrades happening every year that aren't as flashy as a new trait introduction, but ultimately prove to be as valuable as a growth engine.

The next layer of growth expands the South American opportunity beyond corn. On Slide 12, we see the launch of Intacta later this year as a single product that's a game-changer for Brazilian soybean farmers. It's the first insect-protected herbicide-tolerant stack for soybeans. Pierre and I just returned from a trip to Brazil for an event with some of the 500 farmers who took part in our Ground Breakers program this year. These farmers have just completed the ultimate product test drive, and you can't miss their enthusiasm. We shared with them the very early yield results that we're compiling out of this year's program. In this early data, we're seeing the step change in performance that we expected, with initial yield benefits of more than 4 bushels an acre compared with first-generation Roundup Ready.

From here, we'll use this Ground Breakers data to make the key commercial decisions for next year, like pricing and variety availability. That keeps us on track for a launch in Brazil's summer season. Our emphasis is on translating this positive start into a successful first commercial year and we'll step up availability slowly in 2013. So it won't be a big earnings driver in fiscal '13, but it's clearly a major component of growth that starts ramping up now.

This concept of layers plays to our strengths, which you can see on Slide 13, and the lower right quadrant reflects one really new critical point. These are whole new growth initiatives that we're focused on. Here's how I think about these. These are areas that we think can become growth platforms, taking a strategic spot in our business right alongside something as big and as impactful as breeding and biotech. In the near-term, we're investing for success in each area, so these are R&D and commercial priorities with real dollars behind them. There's a rich strategy behind each, but I'll do just a quick run through to give you a cumulative sense of why these platforms matter.

If you start with geographic expansion on Slide 14, to me, our breeding engine is actually the biggest blockbuster in our pipeline. This is an engine that allows us to upgrade a significant portion of our product portfolio across crops and across our most important geographies every year. And that creates compelling annual value that we can take to our customers.

The first place that you can see this playing out is Eastern Europe, shown on Slide 15. There are about as many acres in Eastern Europe as there are in Brazil, and the current yields there are relatively low. Since our U.S. germplasm actually fits the geographic area well, we can fast-track our breeding efforts to getting very near-term growth.

That same idea fits China, shown on Slide 16. The opportunity in China fits the pattern of the other major corn areas that we've seen ramping up over the last decade. It's the second-largest corn market, so the opportunity is big. Improving productivity is going to take time, technology and investment, but we're confident that we have technology in hand, like our breeding capability, that can create new value. And we're in a perfect position to scale up for this opportunity. Since 2001, with the joint venture with Sinochem, who's the largest local distributor of ag inputs and runs China National Seed, that gives us a strong local partner as we look to expand our joint venture to reach this emerging opportunity.

If China and Eastern Europe are about leveraging current capability, the best example of delivering another set of new technology to drive yield is Integrated Farming Systems, or IFS, shown on Slide 17. Robb talked extensively about IFS in his January pipeline update. The idea of precision agriculture isn't new, but the ability to connect Monsanto's vast amounts of seed data to specific on-farm recommendations is new. That creates a big opportunity to connect data and yield. So we're investing in R&D and the core capabilities to scale this up for farmers in the near-term.

You also can't have a conversation about new opportunities without talking about our R&D pipeline, shown on Slide 18. Practically, we simply have more platforms from which to grow than anybody else, and the benefit becomes apparent on this slide. As you'll see with these various platforms, we basically have the potential to launch a major innovation that steps up yield effectively for every year in this decade. As we're able to scale up new approaches like IFS, our breeding capabilities, our RNA technology, I expect that we'll be adding even more growth platforms in this space.

So as I wrap up, I want to bring these layers of growth together with the strategic checkpoint that is our second quarter. And here's how I think about that. First, we delivered a record second quarter. That's important because it becomes the proof point of the strength of our U.S. business and the confirmation that creates the confidence that we now have in delivering ongoing earnings growth in the high-teens for 2012. Second, if you pair this half with the great year that we had in 2011, you see the back-to-back performance that says we believe that we have our momentum back. And finally, that momentum doesn't stop here. Two years of solid business performance underscores our conviction and allows us to look into 2013 with confidence and with renewed energy around our core strategies.

So thanks again for joining us. And with that, I'll hand the call over to Bryan for the Q&A section. Bryan?

Bryan Hurley

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

Maybe I could just ask for a little incremental detail about how you're thinking about sort of the pull-forward of deliveries from 3Q into 2Q versus just total acreage being up. And maybe within speaking to that, you could sort of remind us how many acres of corn and soy were in your original guidance and then how many acres are in it now.

Hugh Grant

So a couple of questions in there. It's an earlier season, and we've seen some benefit on timing as a result of that. So earlier, Pierre mentioned trucking from warehouses. So earlier trucking, earlier deliveries. But all that notwithstanding, we think we've sold more bags of seeds and we'll see share growth as a result of that. So it's nice to have the wind at your back, but we've seen organic growth as well. If you look at the crops -- and then I'll maybe ask Pierre for a bit more color on it. If you look at the crops, we have higher visibility in corn than we do in soy and cotton. It's just a little bit earlier for corn. At 96 million acres, we would forecast that we will still grow share, so isn't the denominator and numerator game. In soybeans, ironically, there's a likelihood that the soy crop will be smaller. So it's even -- it's possible to sell less and grow share in a smaller crop. But the key thing for us in soybeans is Roundup Ready 2 Yield and the fact that it's now 75% of our mix in soybeans. That's the real headline. And then in cotton, I would say too early to call. A lot of the production acres in cotton are coming out of Texas. And it's still been extraordinarily dry down there, so I think cotton will be the last card to turn. But maybe, Pierre, a few more words on mix effect?

Pierre Courduroux

Yes. So, Vincent, to come back maybe specifically to your question around how much is timing and how much is real growth. So if you just step back and look at our guidance, so right now, we are looking at the top end of our guidance, almost 20% growth year-to-year, which I think is an important factor. And definitely corn, because I think your question was targeted at corn, corn is going to be a major driver in this growth and in us being able, feeling good about raising guidance at this early point in the season. However, as Hugh was mentioning, there's still doubt around the acres. And this is why -- I mean, at this point in time, you can still see 2 million, 3 million acres moving late in the season with less days of planting in between soy and corn. And this is why we want to be prudent in the way we talk about it. Overall, within the range of outcomes we are planning to work with at this point in time, we feel very comfortable -- comfortable enough to raise guidance at this point in time. Now how much of the great quarter is linked to timing? How much is linked to the actual performance in our business? It's very difficult to measure at this point in time. We know we are doing very well, but we also know there's an element of timing. And at this point in time, we feel comfortable within the ranges of outcomes we are working with that we could raise our guidance at this point in time. So that's kind of the way we're looking at it at this very early point in time.

Vincent Andrews - Morgan Stanley, Research Division

Then just as a follow-up, because I just want to clarify, I don't think or it doesn't sound like your guidance includes 96 million acres of corn planted in the U.S. and it doesn't -- my guess would be that your original guidance was probably more like flat acres year-over-year. Am I far off on those?

Pierre Courduroux

We've always been looking early on at a 92 million to 94 million acres in our working assumptions. And at this point in time, to be perfectly honest, we were a little surprised with the USDA number at the high side of what we were expecting. So once again, ranges of outcomes, we can see the market 96 million. If the market was at 96 million, we don't expect soybeans to be very strong. So it's a matter of balance at this point in time. So when we look at the financial impact, we are trying to balance those 2 elements basically.

Hugh Grant

Just as a final, final point to Pierre's commentary, the USDA numbers at 96 million acres, there's a plus/minus 3-million-acre error bar on that. And we here at Monsanto would say, to Pierre's point, the difference between 96 million and 94 million is planting conditions in the spring. So that last 1.5 million, 2 million acres really gets down to how open the spring is and what moisture availability is. So it's not going to be driven by demand. It's going to be the opportunistic nature of how open the season is, Vincent.

Operator

Our next question is from the line of David Begleiter of Deutsche Bank.

James Sheehan - Deutsche Bank AG, Research Division

This is James Sheehan sitting in for David. Just wondering if you can comment on -- you mentioned that you didn't think seed supply issues would be a problem for Monsanto this year. I could just -- if you could just comment on what you think the overall market impact might be and how your competitors are dealing with seed supplies in this environment.

Hugh Grant

It's always easier to talk about your own business than your competitors'. So for us, I can tell you that the lion's share of our winter production that's came up from South America is now back and is either on-farm being trucked or being processed. So we're very fortunate in that the South American season was also early. Soil conditions warmed up fast there and the crop came off early. So we've seen a pretty fast turnaround. We've still got a little bit to come back, but the lion's share is back. The stories from the countryside, there are some of the smaller dealers who had production -- either limited production or production all in one geographic area or were limited in what we sent south. There is a squeeze with some of those dealers right now, but we've been more focused on getting our own stuff back and getting it out to our grower customers. So we -- I guess, just to reiterate the point, we feel good about our supply situation and even -- just tying it to Vincent's question, even if there were 96 million acres planted, it's a stretch. Because even if there were, then with some diligence and some focus, we feel we could supply that piece of the market that we're chasing.

James Sheehan - Deutsche Bank AG, Research Division

And then just in light of the success you've had in driving penetration thus far on traits, could you just comment on how you see the value capture model evolving in the next couple of years?

Hugh Grant

In North America or in general?

James Sheehan - Deutsche Bank AG, Research Division

North America, please.

Hugh Grant

So I think value capture is a euphemism for price. And so we've -- our view on this, I think we've done very, very well on the last 2 years on delivering additional products. We've built 2 brand-new platforms, so building additional products to increase the choice for growers. The feedback -- as I've traveled, the feedback from growers has been very, very good. And from a pricing point of view, we've taken a much more conservative stance, and I would anticipate that, that will continue into the 2013 season. So we'll be looking for the leverage on delivering new technologies on spreads in our germplasm choice and really driving Reduced Refuge and driving our new soybean platform. But I don't think you're going to see large price hikes as we look into the '13 season.

Operator

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

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

You had tremendous revenue growth in the first and second quarters, but your deferred revenue's now at -- your deferred revenues are pretty flat or flat to down versus last year. Does that mean that revenues should flatten out in the second half?

Pierre Courduroux

Well, I mean, that's part of the early season we were talking about. So if you look at the balance sheet on a year-to-year basis, I mean, it's very comparable to where we were last year. And if you remember, when we closed the book in November, our deferred revenue were way higher. So this means we've been able to deliver very early this year and a lot. So from that perspective, I mean, this is very consistent with our view that the season is early and that we've been able to deliver very early and that this definitely has an impact on our sales. So we are definitely seeing obviously less growth in the second part of the year than we saw in the first part of the year as far as the deliveries are concerned in the U.S., definitely.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Okay. And your gross -- your incremental gross margin in corn was above 80%, which is pretty unusual. And you talked about there being various timing issues. What was the earnings per share benefit of the timing issues year-over-year in the quarter?

Pierre Courduroux

So as when we discussed with Vincent, I'm not sure we are able to quantify at this point in time how much was timing and how much was the increase in the business. But our assumption at this point in time, it's anywhere in between $0.05 and $0.10, I think, would be a reasonable number. But we'll wait for the third quarter to feel better about the accuracy of that number, because obviously we don't know yet.

Operator

Our next question is from Bob Koort of Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc., Research Division

Wanted to ask a little bit about the business activity through your licensees. On the soybean side, I think, Hugh, you said you had 3/4 of your own product had gone to Roundup Ready 2. I guess, the math suggests that maybe 50% through your channel partners. Can you validate if that's about right and what you expect over the next couple of years both for the Asgrow and the licensee brands?

Hugh Grant

Yes. Bob, that would be about right, maybe a little bit higher than that. So we've -- if you think back 3 short years, you're rolling out these platforms. And those first few varieties in those first few acres are always exciting times. I feel really good about where we are today because overall penetration is high, our licensee sign-up is high and we're seeing the business tracking pretty much on -- exactly on track with where we forecast we would be.

Robert Koort - Goldman Sachs Group Inc., Research Division

And then on Refuge-In-The-Bag, I think you suggested earlier that you'd have a pretty complete transition on your own brands to Refuge-In-The-Bag from Smart -- RIB Complete from SmartStax. Is that what happened so far? And what are you seeing in your licensees there? What kind of penetration have they made from SmartStax to RIB Complete?

Hugh Grant

Yes. On our own brands, we are delighted. So it's exactly on track from where we said we were going to be. The licensees, there's a little bit more variability. But the front end, the leading companies there would be -- frankly, they'd be at or in some cases ahead of where we are. So if you look at it as a composite, we're feeling very good. We're feeling very good with the transition and where we and our trade customers are.

Operator

Our next question is from the line of P.J. Juvekar of Citigroup.

P.J. Juvekar - Citigroup Inc, Research Division

Just a couple of related questions on pricing. What's your average pricing in the U.S? And specifically on RIB, what kind of price increase were you able to charge for the convenience of RIB?

Pierre Courduroux

So, P.J., at this point in time, obviously it's still fairly early, and we've not been through the whole assessment of our final numbers. But the way we look at it, we were talking about corn price increases in the range of 5% to 10% for the year. I mean, we are well within this range at this point in time and we feel pretty good about the reception from the farmers that are translating into volume. And when you look at our performance right now, I mean, 50% would be coming from volume and about 50% from price and mix. So very, very well on track with our plan of the 5% to 10% increases in corn prices we were looking at.

P.J. Juvekar - Citigroup Inc, Research Division

And then secondly, on Integrated Farming System or IFS, when it's rolled out, how do you charge for that? Do you charge a consulting fee? Or is there -- would you have the same profit-sharing model on that? And isn't that sort of conflict with what the retailer is supposed to do?

Hugh Grant

I see the retailer as a partner in this, P.J. And we've been talking to our customers about that. So however we roll out IFS, our retail partners in the trade will be -- they're on-farm; they're walking fields. They'll be a part of that prescription. And they're excited and interested. Now how you charge, we're still working on. But the principle, I would look at this the same way you think about biotech trait. The first step for this is you need to create yield and create an incremental yield that the growers have never seen, then we're back to the usual conversation on how you share it. But I saw -- the straight answer is we don't know yet, but I'm encouraged with the work that we saw rolling through last year, our ability to build those prescriptions on a statistically relevant manner. We're gaining confidence in that area. And now I'll just double back, your question, Pierre's answer on RIB pricing. To me, the really interesting thing is, one, we are -- we've made the 100% transition in our own brands. So that's done. They're RIB Complete. Two, and I've sensed this for the last 3 years but it's really playing out in the order book, growers want this. And the grower demand, the farmer growers' confidence and interest level has risen. And they can cut through the technology and talk about what that brings them on their farm. So 2 or 3 years ago, this was a hypothetical. But you travel in the countryside now, they're there. They're talking about this in concrete terms.

Operator

Our next question is from Laurence Alexander of Jefferies & Company.

Laurence Alexander - Jefferies & Company, Inc., Research Division

Two quick questions on margins. Near-term, how much of a drag was the inventory adjustment in vegetables? And longer-term, as you're rolling out more of these platforms, are you going to see a stable relationship between SG&A and sales? Or are you going to see every now and then a step-up due to greater complexity of this integration of agronomy into your product offering?

Hugh Grant

I'll maybe ask Pierre to talk about margins. I'll say a quick word on SG&A.

Pierre Courduroux

Okay. So I mean, very specifically, regarding your question and the impact of the inventory corrections on margins, when you look at the veggie downside, we have -- 50% of that is coming roughly, and it's not an exact number, but about 50% is coming from the inventory write-offs and 50% is coming from the business in Europe basically.

Hugh Grant

And then on SG&A, the world's a big place, and I don't think the cookie-cutter works terribly well in our established markets like the U.S., as we continue to drive new technologies and expand the technology offering. As revenue grows, you dilute out SG&A. So I don't -- we are built out and we have the capacity to handle those launches without large increments or bubbles on SG&A. In some of the other markets around the world, and we talked about this in the first quarter, we will make strategic reinvestments and we're making reallocation of SG&A as well. And a great example of that is the Intacta launch in Brazil, where we resourced ahead of that launch. And that took incremental sales dollars and incremental marketing dollars. But we might see some of that in Eastern Europe as well as we build out that platform. But the return on our SG&A investment is so healthy that they're well worthwhile endeavors. But us, I don't think that you see SG&A continuing to ramp at the same rate as sales.

Operator

Our next question is from Mark Connelly of CLSA.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Hugh, you talked about the layers of growth in the U.S. Were your regional sales very different from last year? And my second question is on the corn margins. I assume that most of the strong margin you got was on price mix. But what actually happened to the seed production cost and your total cost in seed?

Hugh Grant

Yes. So I'll leave Pierre to talk about production costs. On regional growth, we -- I think we were up across-the-board in our branded business. So we saw a nice performance. We grew largely independently of regional effects. I mean, there's -- I'd rather talk about it in the third quarter when the dust has settled, but we haven't put any seed in the ground yet. But if you look at just general trend lines, we've seen nice growth across-the-board. And then on the cost one, I think there's quite a bit of mythology out there on cost spikes. And, Pierre, we haven't really seen that, I guess.

Pierre Courduroux

No. Actually I mean, once again we are well within the range of assumptions we worked with when building our plans for 2013. I mean, we -- yes, we've been using winter production, but we use winter production every year, and we've not significantly increased winter production. And we've not been terribly affected by the storms last year. So basically our cost of productions are well within our planning assumptions. I mean, at this point in time, this is not a major issue for us. And obviously, I mean, every year, we've got ongoing cost-improvement programs that also help improve our position. So when you look at the 3-point margin improvement that we are seeing in corn at this point in time in the year, I mean, it reflects the fact that our cost has not gone out of control. I mean, we feel pretty good about where we are at this point in time.

Hugh Grant

That's a good point. It didn't passively occur. We've been working pretty hard at that. And we've been very pleased and very fortunate with the crop that's came back from winter nursery. So that's always helpful.

Operator

Our next question is from Michael Picken of Cleveland Research.

Michael Picken - Cleveland Research Company

Just a follow-up on sort of the seed supply issue. I was wondering if you could talk about where you see sort of your inventories being at the end of this year. And do you think there's enough seed if there becomes an issue where the farmers have to replant for this year? And then if you have any idea of what your plans are to increase seed production for next year, that would be helpful.

Hugh Grant

So thanks for the question. I don't really know how to answer it. But my -- our expectation would be that inventories will be low. But that's a function of whether 96 million acres is planted or not. So you get into that circular argument. I would say, in general, based on what we're looking at and the earliness of the season, even up to 96 million acres, given the inventory we have on hand, we will be able to supply our portion of that market. As always, growers towards the end of that might not get their first choice, but they will get a comparable second choice. And that's how our sales team has trained, and that's what we're trying to do to satisfy our grower customers. And I would guess that if the spring plays out on that kind of "half normal albeit early" way, then the industry is going to be low on inventory and that production will be ramped for next year. But frankly at this stage, we're still trucking and we're getting ready for the next few weeks when planting really gets underway. But thanks for your question.

Operator

Our next question is from Don Carson of Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Hugh, a question on soy pricing, actually 2 parts. One, based on the Intacta slide you showed, with 4 bushels an acre and some insecticide savings, that would seem to be roughly $50 of value per acre. Do you think you can get the 1/3-2/3 sharing in South America that you've historically targeted in North America? And then secondly, on U.S. soy pricing, you've had a positive experience in Canada this year post Roundup Ready 1 patent expiration because your competitor patented germplasm, so there's not seed saving. Do you think that, that gives you more flexibility on Roundup Ready 2 pricing in the U.S. ahead of the Roundup Ready 1 patent expiration in late '14?

Hugh Grant

Yes, thanks for the 2 questions, Don. So Intacta, it's at least $50. So we're creating a great deal of value. We are literally in the front end of this. So we -- as I mentioned in my remarks, Pierre and I were down there last week. We had about 130, 140 of the 500 growers together, and it was a great chance to talk to them. So we are in Phase 1. And Phase 1 of this Ground Breaker program is the consolidation of the data, the re-presentation of that data to the 500 and really getting to understand the benefits that we deliver on-farm. My message to them was -- my message to them was we will share and we'll share generously, but we never got down to the 1/3-2/3 split. We're in that discussion right now. The good news is we're creating a ton of value and it's recognized when you meet those growers directly. In the U.S., your question -- so I'm very optimistic. I'm very pleased with what's happening in Brazil. In the U.S., when you do the juxtaposition of what's happening in Canada, I'd say our focus is it's 75% of our mix. We need to finish that conversion. And with the varieties that we've got in hand, the buzz that's been created with performance in the new varieties, I'd say, number one, it's getting that conversion complete. And I'm delighted with the pace that we're seeing. Number two, it's preparing the way for Ground Breakers with dicamba. And there's a tremendous amount of interest there. And again, and I kind of answered this question earlier on corn, on pricing we'll price to the value that we're creating, but this is going to be a step-wise -- pricing for us will be a step-wise process, and we'll be more aggressive on chasing those final conversion acres and demonstrating the value of the technology than getting ahead of our SKUs on pricing. And I think particularly with the feedback that I'm getting on dicamba, I wish it was here tomorrow morning. There's a lot of interest around that stacked product in the U.S. as well. So U.S. and Brazil, different markets, different stages. But we couldn't have wished for a better year with these 2 -- the early platform moves.

Operator

Our next question is from Michael Cox of Piper Jaffray.

Michael E. Cox - Piper Jaffray Companies, Research Division

Just one quick question on the volume growth you described in the Reduced Refuge Family of at least 10 million acres. Could you talk about how important the SmartStax RIB Complete is in that year-over-year growth?

Hugh Grant

It's significant. As you know, we've never broke out the individual components of the family from a competitive point of view. Or we stopped doing that because we were providing such a road map. But we're pleased with the contribution that it's made, but it's -- frankly, the grower thinks much more about yield, about the choice relative to the yield potential on that on his farm. And the feedback has been -- the introduction of Double PRO and creating that extra rung on the ladder, feedback has been very, very strong. So it was a nice addition to the RIB family. So we -- at Monsanto, we tend to think about it more as a Reduced Refuge Family than focusing on the individual product performance of SmartStax. And that was a strategic shift 2 years ago, and it's played out very well for us.

So with that, perhaps I'll just make my -- I'm conscious of your time. Let me just wrap up. This has been a busy session for us. So I'd make 3 points, I guess, in closing. Number one, this -- as Pierre said, this was a record second quarter for Monsanto. And I think that's important because it becomes the proof point of the strength of our U.S. business that we've discussed in the call today, and it's the confirmation that creates the confidence that we now have in delivering ongoing earnings growth in the high-teens to 20% for 2012. Secondly, if you pair the strong first half with the really great year that we had in 2011, you see back-to-back performance that says we believe we have our momentum back. And finally, that momentum doesn't stop here because I think 2 years of solid business performance really underscores our conviction, and it allows us to look into the 2013 season with confidence and the renewed energy around our core set of strategies.

So I wanted to thank you again for joining us this morning. And I'll hand the call back to -- and I'll hand the call back to Bryan. Thank you very much.

Bryan Hurley

That's good. So with that, I think that, that would conclude our call, Rob.

Operator

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

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