Greetings and welcome to the Third 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, Mr. Bryan Hurley, Investor Relations Lead for Monsanto. Thank you, Mr. Hurley. You may begin.
Thank you, Lewis, and good morning to everyone. Thanks for joining us for Monsanto's Third Quarter Earnings Conference Call. I'm joined this morning by Hugh Grant, our Chairman and CEO; and by Pierre Courduroux, our CFO. Also joining are Manny Cruz, Bryan Corkal and Ashley Wissmann, my colleagues in Investor Relations. The call is being webcast, and you can access that webcast and the 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 referred to non-GAAP financial measures, we reconciled 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 and results may vary in a material way from those expressed or implied in any forward-looking statements. A description of the factors that may cause such a variance is included in the Safe Harbor language in our most recent 10-K and in today's press release.
With our guidance update last month, our conversation today is intended to do 3 things: We'll highlight the business drivers that have Monsanto on track for a second year of 20% plus ongoing earnings growth in fiscal year 2012; we'll provide clarity on how those drivers then set up our growth in 2013; and we'll provide the guideposts on the financial metrics that shape our view on '13.
I'll start with our fiscal year 2012 performance and in particular, a brief review of the financial results for our third quarter on Slide 4. Very simply, our performance in the quarter directly flows from our guidance update last month, so you see the positive trends we describe flow through our financial results today. The results roll up to ongoing earnings per share for the quarter of $1.63. That compares against ongoing EPS of $1.28 in the same quarter last year as the strong overall performance across the business drove the upside in both our quarterly results and in the increased full year guidance from last month.
You can see that across-the-board performance best looking at the year-to-date results. Start with Seeds and Genomics, where gross profit is up 20% through the first 9 months. That is the biggest factor in our growth this year. Within that, corn is the biggest driver, with gross profit up more than 30% for the year. That growth comes from 3 geographic areas: The core U.S. business, the acceleration in Latin America and our other global seed businesses highlighted by the rapid expansion in Eastern Europe. This growth reflects the combination of mix improvement and volume expansion as we step up the value of our product portfolio, increase our total corn volume and saw particularly strong planted acres in nearly every key corn-growing region. This performance is flanked by good year-to-date performance in our Soybean and Cotton businesses, while softness in the Vegetable business reflecting the soft European economy continues to offset a portion of that overall strong Seeds and Genomics growth.
Also, as we indicated in our guidance update, we also saw strength from our Ag Productivity segment. That uptick also comes across the board as we've achieved strong volume mix and pricing in Roundup, we've had another good year in our Lawn and Garden business, and we're seeing growth in our selective chemistry offerings. On the cash side, our strong business results also flowed into our free cash generation as through the third quarter, free cash flow was $311 million compared with cash flow of $237 million through the first 9 months of 2011.
In sum, this top line growth through the third quarter speaks to the earnings power of a global business in a growth mode. So from here, let me turn it to Hugh to lay out how we see the next stage of growth in fiscal year '13.
Thanks, Bryan, and good morning to everybody on the line. With our largest selling seasons now complete, this third quarter is the punctuation mark in another year of compelling performance in our business. Simultaneously, it's the jumping off point as we expect to carry this year's momentum and to continued strong growth in fiscal year 2013.
I'd start this morning by highlighting 3 of the most compelling accomplishments that define 2012, reflected on Slide 5. First, we captured the momentum that we've seen building in the business. This began in 2011 and it continued through 2012. With back-to-back years of across-the-board performance and 20% plus ongoing earnings growth, we're clearly in a growth mode.
Second, we've taken the business to a global stage. This was the first year our International business was roughly an equal contributor to our total growth. And that's the leading edge of a trend as we see growth accelerate in a couple of these key geographies.
And third and maybe most importantly, the strategy that we set out 2 years ago to focus on yield and bring more product choices to our farmer customers is now in full swing. With that strategy firmly in place, that means what we need to do to drive growth in 2013 is simply a continuation of what we've accomplished this year. That consistency is important, both with our farmer customers and within our own organization.
So taken together, those 3 factors create a clearer line of sight on growth than we've had in some previous years. And that's reinforced, as we've reconfirmed our projection of mid-teens ongoing earnings growth for fiscal year 2013 from the higher expected 2012 base of $3.65 to $3.70.
If you move to Slide 6, that means we can focus today on how we take our strategy forward to drive that growth. The specific opportunity for Monsanto in 2013 actually starts on a much larger stage. Simply put, the drivers of global agricultural growth are real and they're ongoing. It's a well-told story, but I think it bears repeating. As rising global incomes drive more demand for protein, it creates a runway of opportunity that extends for more than a decade, which we show on Slide 7. While this is an opportunity for many in agriculture, it's even more pronounced for us. We're a yield company, and we have the products and the technology in the right markets to meaningfully drive productivity. The things like yields, acres and prices will move from yesteryear but structurally, the business drivers that we are focused on continue to play out for an extended time horizon. And given the larger global volatility, that's a really meaningful backdrop.
As you think about how that translates to our growth, the logical place to start is the U.S. It's our core market and we expect it to continue to be a major contributor to growth in 2013. One of the big reasons is the build-out of our platforms in corn and in soybeans, shown on Slides 8 and 9. With sales behind us and an early line of sight in returns, we project our Reduced Refuge Family will be on more than 25 million acres this year, ahead of our projected high end of 24 million acres. Likewise, our Roundup Ready 2 Yield soybeans are coming in near the high end of the initial range as we reached close to 30 million acres, and a total soybean market that may decline in 2012. These are both platforms of momentum and they are key for 2013, which we step in each platform up even further.
The next big driver in the U.S. is the volume growth and mix benefit that we get from the annual upgrade of our portfolio with the latest high-volume germplasm captured in Slide 10. In 2012, we've clearly seen an increase in total U.S. branded seed volume. Practically, across the key corn and soybean platforms, that puts us on a track for organic share gains in our brands in both of these crops. And going into 2013, this germplasm refresh will certainly be as important to growth as it was this past year.
Coming into this year, we projected a total portfolio price lift in corn in the range of 5% to 10% from this refresh. That has played out the plan. And while we haven't communicated specific pricing, we project that same 5% to 10% range in portfolio price lift for 2013. That speaks to the consistency that we want to reinforce with our farmer customers. The predictable financial benefit of this annual upgrade, as well as why our practical approach to pricing creates a positive lift, even in a variety of commodity price environments. So the combination of that platform build-out and germplasm upgrade means that we're adding a big increment of growth on our biggest geographic base. And that anchors a significant portion of our 2013 opportunity.
So if you move from the U.S. around the world, you can see why we focus on our international business as a powerhouse of growth in 2013. That all begins in Latin America on Slide 11 as the corn opportunity is driving some of the most pronounced growth rates in the company right now. And we're on the front edge of trait penetration. If we start with Brazil, the rapid trait growth to-date was primarily driven on just initial trait penetration of first- and second-generation single traits. As we look to 2013, the key for Brazil is the beginning of the upgrades to the first true double stack trait in VT PRO 2. We expect to step that up from a small amount of our mix this year to the second biggest trait in our portfolio in 2013. That's important because the gross profit lift as we upgrade from the first-generation trait to the double stack is between 70% and 80% per acre.
That same pattern holds true for Argentina on Slide 12. In 2013, the key in Argentina will be the upgrade from the double stack to the triple stack. The conversion is expected to be in full swing in 2013, and we expect Triple PRO will be over 1/3 of our branded mix. Like Brazil, the gross profit upgrade's important as there's a 20% to 30% lift over the existing double stack. And if you take Latin America as a whole, the beauty of this trait curve is it's not a one-shot benefit. Coming behind today's upgrades are multi-trait stacks that gain a runway that we expect carries out over the next half decade.
If we move from corn to soybeans in Latin America, we don't expect it to be a big financial contributor in 2013, but the launch of Intacta in Brazil this year is the major strategic milestone, which we show on Slide 13. In fact, the Intacta opportunity is among the biggest single drivers that we see over the next few years. We see Intacta as a step change for soybean farmers, and farmers' own data from our recent Ground Breaker trials showed yield benefits of better than 4 bushels an acre. This creates somewhere around $80 an acre in total value for our customers. So the appetite for this technology is very strong. And as we launch it this year, the portion of that benefit that we capture becomes a major financial step up compared with the first-generation Roundup Ready in Brazil.
If you pair that with the increasing optimism that we have for taking this technology to Argentina, Paraguay and Uruguay, and the total opportunity over this next several years, targets more than 100 million South American soybean acres.
From Latin America, I want to zoom out to the next big piece of our 2013 global opportunity, and that's our corn breeding opportunity, highlighted in Slide 14. Robb Fraley often talks internally about our breeding engine being our biggest but our least appreciated blockbuster. It's an engine that allows us to upgrade the significant portion of our product portfolio across crops and across our most important geographies every single year. And just like what I described in the U.S., that upgrade creates the mix, pricing and volume opportunity that drives our international business.
You'll see this in 2013 as we expect our Corn business to grow in conventional seed markets, ranging from Mexico to Western Europe. But perhaps the best near-term example of that opportunity is in Eastern Europe on Slide 15. The corn footprint in Eastern Europe is as big as Brazil and it's been expanding. We fast-tracked our breeding upgrades, drawing in the translation that we get as we take our leading U.S. germplasm into this market. In the past few years, we've nearly doubled the share and became one of the leading seed companies in Eastern Europe. And with expanding acres and our ability to upgrade their offerings every year, this is another of the fastest-growing businesses in our global family.
From the picture of the big growth drivers, there's a couple of areas that round out our growth projections. Notably, we expect the Vegetable business to rebound to growth in 2013. Going into next year, we see more diversified geographic growth and some early contributions from new products, returning this business to a growth mode on its way to becoming our third-largest crop in the coming years.
Second, within the Seed business, we continue to see steady contribution from our Cotton business. This is actually one of the highest margin platforms that we have, so we continue to see it contributing to our margin opportunity.
And no conversation about growth is complete without a nod to our R&D. By definition, the pipeline isn't a contributor to 2013 earnings, but is definitively the driver that will turn over the next layers of growth beyond this year. Today, we have more platforms that will drive yield than ever before. You can see that in Slide 16. Considering the output of all the platforms, we have the potential to launch a major new innovation that steps up yield every year this decade. And we've turned over some new cards and opportunities like integrated farming systems and our bio direct platform that established the line of sight on new growth beginning as soon as 2014.
It's one thing [indiscernible] these growth drivers in a call like this, but I also think there's real power in seeing the products and the technology behind the business firsthand. So this year, at our Whistle Stop tour, we'll highlight these future growth drivers to give you that firsthand view. We hope many of you will be able to join us in August to experience our technology, talk to our teams and see this growth in action.
So before I hand it off to Pierre, let me leave you with the key points that strike me as we now bridge between 2012 and look forward into 2013. First, I like our momentum. With back-to-back years of 20% plus ongoing earnings growth, we are firmly in a growth mode. We have a strong strategy in place and I'm very pleased with our execution. Second, there's more opportunity to come. Despite the annual focus on commodity prices, acres and yield, the reality is the demand driving global agriculture is real and it's growing. And that creates a lot of opportunity for a long, long time. And third, the opportunities translate into tangible growth for Monsanto. If we combine our momentum and the overall opportunity, I feel as good about our growth going into a year as I have in a long time, with more growth drivers than ever in my time as CEO, and those fundamentals carry us to further growth in the future.
So thanks again, and with the remaining time, let me hand over to Pierre
Thanks, Hugh, and good morning to everyone. Today, Hugh laid out the cases for how we see our growth objectives in 2013. As CFO, there are 3 things I want to add to the discussion to help provide some color on how we see the growth translating into our financial statements. First, I want to reinforce our fiscal year 2012 guidance and use the third quarter data to complete the financial picture of our view of the year. Second, I want to highlight the key drivers for the trends we see carrying into 2013 financials. And third, I want to speak to how we see that growth translating into cash and enabling our strategy for cash deployments.
Let me start with a practical look at the walk-through of our guidance on Slide 17. As I consider our financials, the most important point for me is that the data for the third quarter really validates the trend we expected coming into the year. The first point is that the majority of total growth came from Seeds and Genomics and that's certainly consistent with what we laid out coming into the year. In general, we entered the year with a range of expectations for the key drivers in Seeds and Genomics. And through the third quarter, with the exception of Vegetables, those businesses are all delivering at the high end of those early expectations. So taken together, you'll see the strength reflected in our step up of gross profit guidance for Seeds and Genomics to between $6 billion and $6.05 billion for this year.
Secondly, Hugh didn't spend any time talking about our Ag Productivity segment, as we continue to see that as a steady contributor, the other source of significant incremental growth. But for this fiscal year, we tracked very nicely against our strategy and we've seen some upside in each of the 3 businesses within this segment. This performance is reflected in our new full year gross profit expectation of approximately $900 million. Practically, I think we are in a good steady state run rate for this business, and our planning assumes a relatively consistent band for the segment going forward.
Third, on the cost side, with the acceleration of the business this year, we view some additional SG&A in the form of commissions and some investments in our people, structure and organization. Likewise, with some of the expanded R&D platforms that Hugh mentioned, we've made some incremental investments in our research this year. As a result of the accelerated business growth and the investment in both categories, I see us potentially above the upper end of our original ranges for SG&A and R&D for the full year.
So as we round up this year, we feel very good about our bottom line guidance of $3.65 to $3.70 of ongoing EPS. And at the high end of that, we will deliver up to 25% growth in ongoing earnings from last year.
From here, the last talking point in the fiscal year will be the fourth quarter. Given the pattern of earnings flow for the third quarter, we expect a larger loss in the fourth quarter this year than we saw last year. As I look at the key business drivers in the fourth quarter, the biggest strategic element is the Corn business in Brazil that Hugh emphasized, and the early season check for Brazil corn is going very well. So we expect it to be a positive factor in Q4. However, as we previously mentioned, the earning power of that factor won't fully offset the incremental changes we see in other areas, including the timing of the Australian cut and trade fees, the lower relative soybean POD revenue in Brazil and some of the additional operating expenses that come in the quarter.
If I now shift from this practical look at the financials to some of the trends behind the numbers, I think it helped establish a couple of the early guideposts to translate the growth Hugh described in our financial outlook for 2013. And we provide a couple of looks at our fiscal year 2012 financials on Slide 18.
First, our growth in 2012 has been split evenly between the U.S. contribution and growth from our international regions. The strong growth rates in international regions like Latin America and Eastern Europe provide a very nice complement to the core expansion in our U.S. business, and our growth mix next year should be near the 50:50 ratio we see this year. Now if we look at the second cut, our growth this year tracked roughly 40% from volume and 60% from price and mix. The clear majority of that price and mix comes from the mix side, as the strong adoption of technology and the annual breeding upgrades Hugh emphasized provide a significant benefit. And as I think about 2013, we expect those core upgrades will drive more of our growth, and the price mix component will be an even stronger contributor to growth than it was this year.
Third, if I now look at the sources of our Seeds and Genomics growth in 2012, we see the strong majority coming directly from the fundamentals, strategic drivers of the business, while the smaller portion reflects the benefit of the uptick in global acres this year. Given so much of the growth is driven by the strong fundamentals of the business, it reinforces our confidence that the strategic levers Hugh laid out really underscore our opportunity for 2013.
And as always, as we lay out our planning for 2013, we recognize some of the structural variability in agriculture and we build our plan around a range of assumptions. Practically, we do not plan that this 2012 spike in corn acres will repeat or that some of the peak spot prices on commodities will hold. Rather our assumed acre and commodity price bands reflect the ranges we've seen over the past few years. And that approach to some of the key macro variables reinforces our confidence in our ability to deliver our business results in the normal ebbs and flows of our industry.
As we look at the final translation into 2013, the last point I want to make is around the strategy for cash. In 2012, we again see the cash generation capability of our business. And I'm particularly pleased to highlight that we see ourselves as a technology company that is able to deliver consistent and strong cash flow. Converting earnings into cash is one of my clear priorities. As we use that cash, I continue to see investment in the business as a priority, especially in areas that can add to our growth opportunities. In the last quarter, we announced a technology acquisition that will help accelerate our efforts in integrating farming systems. And we are always looking for further acquisitions that can build out some of our growth platforms.
Our strong cash flow also allows us to prioritize the value we can return to shareowners. Over the past few years, we've tried to strike a balance between our share buyback program and our dividend payouts. With some additional buybacks in the third quarter, we are nearing the end of our current authorizations. And in the last month, our board authorized a new $1 billion program which we expect will allow us to continue our ongoing buyback activity. Through the third quarter, we've used a total of more than $900 million on dividends and share buybacks or almost half of our projected full year free cash flow. As I think about the next step in cash deployments, today we are actively looking at how we can drive this cash strategy to further optimize how we translate the continuing growth in our core business into new opportunities and more return for our shareowners.
Let me conclude by stepping back from the numbers for a moment. I'd summarize by telling you that there are 2 things I take away from this third quarter. First, the third quarter is the punctuation mark that validates the strong year we've delivered financially. With up to 25% ongoing EPS growth, we've seen growth come from where we expected to see it, and we are on track with a strategy based on strong fundamental business drivers. Second, we take a very clear eye view on 2013. And when we do that, we see compelling opportunities that give us the confidence to project financial growth even from this higher base.
With the business engine we have in place, I am confident in our ability to deliver in 2013. With that, let me turn it back over to Bryan for the question period.
Thanks, Pierre. We'd now like to open the call for questions. And as we typically do, I'll ask that you please hold your questions to one per person so that we can take questions from as many people as possible, and you'll always be welcome to rejoin the queue for a follow-up question. With that, Lewis, I think we're ready to take questions from the line.
[Operator Instructions] Our first question comes from the line of Jeff Zekauskas with JPMorgan Chase.
Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division
For the 9-month period, were your U.S. soybean seed volumes up or down? And for the 9-month period, were your U.S. corn seed volumes above 6% or below 6% in volume?
Yes. Jeff, thanks for the question. I'm going to ask Pierre to say a few words. But directionally, in both of them they're both up. So we're pleased on, as I mentioned in my remarks, we're pleased on volume growth because they were up and they were ahead of the market in both segments. But Pierre, I don't know if you have any other color on that.
I mean maybe the only color we can give is that, in both cases, we see our growth in volume faster than what the market has been reflecting.
Our next question comes from the line of David Begleiter with Deutsche Bank.
David L. Begleiter - Deutsche Bank AG, Research Division
You had just given the weather stresses in the Midwest, are you expecting more differential performance for your corn seeds this year, given your enhanced germplasm? Could that benefit – would that benefit 2013 market share gains?
Yes, so nobody celebrates lousy weather. And it is warm and dry. I was driving in this morning, they're talking about 108 degrees here in St. Louis in the next couple of days. So it's a warm and dry stretch. I think what you're alluding to, David, is our genetics tend to do well in warm and dry conditions. Our roots and stalks perform better than our competitors in these conditions. It's not something that you would hope for, but we have an edge in that. This year, we're feeling good about share gain in both corn and in soy. And I think that die is cast this year, but it generally helps if they see that performance in the field when growers are making up their minds this fall. But I'm kind of playing for harvest this year before we get into that. I mean we're -- the reality is we're growing a lot of seed ourself. The vast majority of that is irrigated, but it would be real nice to see a splash of rain at some point.
Our next question comes from Vincent Andrews with Morgan Stanley.
Vincent Andrews - Morgan Stanley, Research Division
The question is, we're about to have another year of difficult weather and probably much lower-than-expected yields and then who knows where this plays out but it certainly feels like it's headed into the low 150s if not into the 140s. Can you talk a little bit about, seed supply was tighter than normal this year, particularly with the smaller manufacturers, can you talk a little bit about where that would go next year? Let's assume the yield is between 145 and 155. How tight could the seed market be at both ends of that band, assuming we have to plant another 96 million acres of corn?
Yes, Vincent, thanks for the -- I mean that's a multi-factorial one. So as I mentioned in the previous point, we are growing seeds right now. The majority of our seed, not all, but the majority of that seed is irrigated and it is geographically very diverse. I think for some of the smaller producers the way this year is setting up, you could see a repeat performance to last production season, where it's going to be tight for some of them. And there is a possibility for all of us in the market, if this continues, that we could be looking at them a little bit more towards Latin American production in the back end of the year. But I would remind you that even with the tight production constraints in this last season, we felt confident in our ability to supply a 96-million-acre market. And that's what we'll gear our production against this year as well. So it's still early call, but it is very, very warm and very -- we even had an attenuated dry spell. But I don't think -- we're going to be a lot smarter in a month's time.
Vincent Andrews - Morgan Stanley, Research Division
And just as a follow-up, the amount of winter production that you've budgeted into your sort of mid-teens growth forecast for next year, is that above or below normal?
It's within averages. And the one point, Vincent, is -- I mean that's one of the points we made. I mean we are budgeting the market next year to be in a range which is consistent with the last couple of years. So we're not shooting for a 96 million acres in our mid-teen guidance. I mean I think it's an important point there.
It's like Pierre, you would say...
We're looking at a range in between 92 million and 94 million acres in the U.S. This is what we based our plan on. Having said so, as Hugh mentioned, we feel comfortable if the market was going to spike up again, we'd be ready to supply the market. But this is not the base for our financial assumptions and our mid-teens guidance this year.
Our next question comes from the line of Michael Picken with Cleveland Research Company.
Michael Picken - Cleveland Research Company
Just want to follow up on the South American opportunity. You guys had talked about in Argentina, that Triple PRO have reached up to 1/3 of the portfolio this year, and I was wondering if you could give a similar sort of number for the Double PRO in Brazil. And then similarly, on Intacta, if you could give us any sort of outline for kind of your expectations for fiscal '14 and would we expect to see a similar type of slow ramp up in year one in fiscal '14 and how quickly that could ramp up?
I'll say a few words on Intacta and Pierre maybe say a lot there in Argentina. So Intacta is going to be a really significant product for us. Next year is our launch year. It's going to be small. We'll be constrained in the amount of seed that we have available. So the way I would think about Intacta in Brazil is '13 is the setup year. It's financially immaterial, but it really sets up '14 and particularly '15. So '13 is the tee up for 2 big years in Brazil. And we continue to make steady progress in Argentina. So Pierre and I were down in Brazil recently, we saw the prelaunch activities. But I think Intacta is all at play for. And then corn is quite different. Corn, the opportunity is very near and present. And maybe a few words on that, Pierre.
Yes. And to come back to your question regarding how we are thinking about Double PRO in Brazil. So Double PRO is going to be our second largest -- I mean the second largest part of our portfolio next year in Brazil. And actually, the key limitation there is our ability to ramp it up fast enough. So it's going to be the second largest, and we're looking at potentially 1/3 of our mix which still leaves us a lot of runway. But as I mentioned, I mean here, the critical factor is definitely our ability to ramp it up.
Our next question comes from the line of P.J. Juvekar with Citigroup.
P.J. Juvekar - Citigroup Inc, Research Division
So your question on Brazil, and how do you get paid there and how much do you got paid there? Your POD System is getting challenged in the courts and so how do you protect your franchise down there? And secondly, on Intacta, you mentioned that you expect savings up to $80 per acre. Do you believe that you can capture 1/3 of that savings just like you do in the U.S.?
P.J., thanks for the question. So let me start with Intacta. So as I mentioned in the last comments, Intacta has the capacity to be a game changer. Growers spend more on insect control than they spend on wheat control in Brazil, and it rains at the same time every day. A lot of it is equatorial conditions and insects. They can skeletonize a crop. So you're right, we're creating $80 worth of value in an acre, and that has been consistently proven out on our Ground Breaker trials. And we've not declared on pricing, but I think 1/3 to 1/4 of that $80 value would be a reasonable benchmark on thinking about how we would share that through. On POD, just 2 or 3 points. I don't think there's much new here. We've seen challenges repeatedly over the years. The way I would think about it is the system is 8 years old -- 7 or 8 years old, and before the system was set up, we never had any capacity for capturing value. If you look at this last year, the amazing thing that's changed in our collection system is in this last year, we sold more bags of soybean seeds than we did -- we captured value through fresh bags of brand-new seeds than we did off the back of trucks at collections. So it's a dynamic system and it's changing. And farmers are recognizing the value of new genetics and fresh seed every year, especially when you look at global prices of soybeans. So you should never say never, but I'm encouraged with the trends that are occurring there.
Our next question comes from the line of Mark Connelly with CLSA.
Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division
When we look at the issues that we've seen in the last few months on cotton, we've got -- we're planning less than the U.S., we've got the policy flip-flop in India, now we've got questions about dominant resistance in China. I'm just wondering how you're thinking about cotton's position in your portfolio, especially after you say that vegetables is going to be #3. I mean do think that cotton has peaked?
Thanks for the question. You're right, we've seen a better retreat on acres, but we saw a gigantic spike last year. So if you normalize the curve and you look over 3 to 5 years, I'm less concerned about the acres in the U.S. The flip-flop in India, just to kind of put a bit of color on that, India held back domestic supply. In other words, they sat on exports for a while. As I understand it, they've opened the doors again and they have record crops that are now beginning to be exported again. So as I mentioned in my remarks, cotton on an acre is one of our most profitable crops. And I think that we'll see cotton being eclipsed by vegetables, but that's not a weakness in cotton, that's a strength in veggies. And if you look -- we've just finished our 5-year plan and I would say directionally, when you look at that 5-year plan and you get in year 4 and 5, probably more than 5 or 4, we see with our acquisitions the Vegetable business having the capacity to pass cotton. But I don't want it to be seen that cotton's going to be downgraded. And so I think continued improvements in Bollgard, the run out of dicamba-tolerant genes on top of that. There's a good story in cotton going forward as well.
Our next question comes from the line of Laurence Alexander with Jefferies & Company.
Laurence Alexander - Jefferies & Company, Inc., Research Division
Could you tease out a little bit more detail the path for the Vegetable business, that is how much of it is going to be volume versus margin? And particularly on the margin, how much of it is back-end loaded?
Yes, I'm going to say a few words and let Pierre give you a little bit on mix. I think, as I mentioned in my remarks, I think next year we'll see -- we haven't laid much of this out, but next year we'll see the front end of some new products coming. And with those new products, you get the opportunity to look out a little bit of price and the value that you create. And a little bit of margin uptick that comes with that. We've cleaned up a lot of obsolescence, so that's a onetime effect. And we're not optimistic that we'll see a turnaround in Europe next year, but when you look to the East, there's a crescent, and I'll let Pierre talk a little bit more of this, but I think -- we don't expect a rebound in Europe, but we see some of these other markets picking up here, right.
Yes. And where we see the growth, I mean, in the next couple of years is definitely in adjusting our efforts, I mean in Eastern Europe, the Middle East where we've seen a lot of the business go over the last couple of years. And so as Hugh mentioned, we've done a lot of work in Western Europe to clean up our portfolio and adjust our business model there. But we are also expanding, I mean, in the Middle East specifically, but also in India and potentially in China, so this is where we're going to be seeing, I mean, volume gains definitely. And as Hugh mentioned, we are starting to see some of the products coming out of the breeding pipeline that are going to be bringing some additional value. So it's really redeploying our resources and relooking at the markets and then bringing the new products, I mean, we've been putting together over the last couple of years. This is how we see this business definitely rebound.
Our next question comes on the line of Frank Mitsch with Wells Fargo Securities.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
Pierre, I wanted to follow up on your comments on use of cash flow. You were indicating that year-to-date, it's 50% has been spent on share buyback and dividend. But then, right after that, you seemed to veer into more focus on growth and I'm not sure if you were signaling M&A or organic means to grow, so I was wondering if you could expand upon that. And while you're at it, if you could also offer some comments with respect to the recent Precision Planting acquisition?
Okay. So what we've been doing over the last couple of years, I mean, regarding our cash flow and regarding return to shareowners, what we've tried to do is strike a balance in between the use of our dividends and the buybacks, and we came roughly to a 50-50 type of balance. And right now, I mean we've got a very strong balance sheet. We've got enough free cash to generate a lot of our own growth. And we're looking at how to redeploy this cash on an M&A perspective, as you mentioned, but also how we can return the cash to more efficiently to our shareowners. So this is really what we are signaling here. We're taking a hard look at how can we optimize the return to our shareowners through buybacks and dividends as well.
Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division
All right. So that might be a faster pace of buyback than just the typical offsetting of dilution then, possibly.
Well, we've not made any decisions at this point and we are really taking a hard look at it and taking input there.
And then, Frank, you mentioned Precision Plant. And so just, I'll be real brief, but a couple of words on our whole precision agriculture or IFS, Integrated Farm Solutions. So we are looking at -- if you look at growers today, one grower told me I'm data rich and insight poor. So they're drowning in data, but they're looking for the key data that leverages their decisions and they're looking for that data on a timely manner. And our acquisition of Precision Planting over in Illinois, I think, is a first and a cornerstone acquisition for us as an investment in this space. So we're going to be building models to allow the grower to access prescriptions that unlock more yield on an acre. And in the last 2 years, with our own field trials that Robb and his team have led, we are seeing with big growers who are already sophisticated, we're seeing 8 to 10 new bushels of corn on an acre using some of these systems. So more accurate planting, more controlled spacing, a number of hybrids planted across the same field. We're seeing 8 to 10 new bushels, which I kind of think of as literally a new trait. And if we can deliver consistently and predictably 8 to 10 new bushels, there's a business in there. So I'm very excited with the deal we've done with Precision Planting and I think we'll be investing more in this space.
Our next question comes from Duffy Fischer with Barclays.
Duffy Fischer - Barclays Capital, Research Division
If we could go back to Intacta for a second, just 3 questions on that. Which countries do we need to see the export approvals before we're willing to launch, would be one? Two, if you go into Argentina, how do you protect the IP down there relative to what happened with Roundup Ready the first time around? And then just 3, in the launch in general, a lot of the stats look similar to a launch for Roundup Ready in the U.S. that didn't go as planned. Kind of what are the differences in how you're going to launch down in Brazil? How much more research have you done that the actual yield benefits are there and will be seen by the farmers in the first couple years?
Thanks for the question. So if I can just remember them, the first one, we're still waiting on Chinese approval. So that's still to come. The others have came in, in good order and actually ahead of the tape. So we're waiting on China, and that would be our last approval before we rolled. Your other question was Argentina, and what makes us feel better about Argentina. We've been rehearsing on Argentina for nearly a decade. So we've been waiting on the opportunity that Intacta brings. If you think about what needs to happen in Argentina, there's 4 or 5 areas, I'd just kind of quickly run through, one is IP and establishing a pattern down there for Intacta. We've achieved that. That's in place. We've submitted for regulatory approval, so that's pending. The third one would be farm and direct agreements, so contractual agreements with growers. And we've made really good progress there and we are in discussions with the grain handlers there. And I would say I feel good about the progress we've made across those 4 areas. And when we have green lights in those 4 areas, then we would be good to go in Argentina. And then your last question, one was...
Duffy Fischer - Barclays Capital, Research Division
Just one on the U.S. Roundup Ready launch versus down there and what the differences will be?
Yes. And that's a great question. So lessons learned. I think we garnered -- I think we all learned a lot with the U.S. launch. And our conclusion coming out of that U.S. launch was we were going to work much more closely with our grower customers when we rolled new technologies. And we started a beta testing system that we call Ground Breakers. And I can tell you, Pierre and I and Robb Fraley were there and met 150-ish of the 500 Ground Breaker growers in Brazil. And the lesson learned is working directly with 500 people who are advocates for the technology, they've touched the product themselves, they can talk directly about the wheat control, the yield improvement, the insect control. And that's a groundswell movement. So having that group in a room talking about their experience with the technology, I don't think there's any substitute for that. So that's really an absolute offshoot from what we went through in the U.S. We've got Ground Breakers in Brazil, we have Ground Breakers this year right now in drought testing in the U.S. Next year, we'll have a significant Ground Breaker program in the U.S. on our Roundup Ready 2 by dicamba soybeans. So all that came directly out of the early launches in the U.S. So that's how I would think about it, it's leveraging wisdom.
Our next question comes from the line of Don Carson with Susquehanna Financial.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
Hugh, I want to go back to the U.S. market. I mean this was the first year you appeared to have a more segmented strategy and I know you had significant amounts of VT Double PRO available. Was that the key driver of the upside in volumes to the Reduced Refuge Family? And how do you see that benefiting you from a share and earnings standpoint as you go forward? And will -- you just mentioned the Ground Breaker on drug-tolerant corn. Will that enhance your position in the Western Corn Belt as well?
Don, thanks for the question. So it's interesting, I would say that the Reduced Refuge Family across-the-board grew. We increased -- as we predicted, we increased the number of hybrids in SmartStax. The Double PRO was a brand-new segment for us and we were really limited in availability. So this year, we have that reasonable amount of volume and it was being placed in markets that we were largely absent from. So if you think about the Western Corn Belt, we were competing with -- we were directly competing with competitors with an improved offering with Double PRO Reduced Refuge. So it was a really powerful combination. I think as we look in at '13, there's even more that we can do in that space. So I don't think we've really seen the full capacity of Double PRO playing out, and I'm optimistic about what we see in '13. If I look across our growth this year, we were up in volume. We beat the market. So Pierre's point, we outperformed. So we grew faster than a growing market. And I think a big piece of that was number one, our yields, we outperformed in yields. And when farmers put their hands in their pocket this year, they were looking at yield data from a year earlier. Number 2, it's your point, it's Reduced Refuge and the growth in that platform. And number 3, it's Refuge-In-A-Bag. I think that was a game changer. And when farmers go a red [ph], they are not going back. It brings convenience, ease and better record-keeping. And I think it was the 3 of those in combination that really drove velocity this year. And the nice thing about it is it plays into '13 as well, so it's not a one-off effect.
Donald Carson - Susquehanna Financial Group, LLLP, Research Division
And just to follow up on that. What was your availability of VT Double PRO this year? How much more could you have sold? And just remind us of what your market share is in that double stack territory versus your, say, 37% national market share?
Yes. It's a lot less than our national market share. We were late comers to the segment and it was a part of the country where we were visitors, but we weren't resident. So we've made a mark, but there's a long way to go. We've never broken that out, Don, but if you kind of think about it as '11, '12 and '13, '11 we had a handful of seeds, '12 it was meaningful and '13, we won't be short. So that's kind of how I'd think about it. '11 was the tryout, there was a lot of people interested. '12 we placed it on -- with key customers and we got a bit more traction. But '13, we'll be unconstrained.
Our next question comes from the line of Michael Cox with Piper Jaffray.
Michael E. Cox - Piper Jaffray Companies, Research Division
My first question is, I was hoping you could discuss the size of the field trials for the prescription model this year as compared to what you've done last year, perhaps the last couple of years, and as you gear up to a 2014 launch of that prescription model? And then a quick follow-up if I could. Had Latin America grown to become large enough that as I look at your fiscal first and fourth quarters combined, could you be making money in total in those shoulder quarters in 2013?
Maybe start with the shoulder quarters and how you think about it.
So when you look at fourth and first quarter, so fourth quarter of this year, first quarter of next year, we're definitely expecting to see a growth coming from South America and the South American corn business. I don't think it's going to get us into EPS positive range, I mean, next year in 2013. We're not going to be there yet. But definitely we should see some growth coming from South America and mostly our Corn business there. So growing but still, I think, when you look at those 2 quarters, those are still going to be loss for us in the foreseeable future.
And then your other question on IFS and scale, here's kind of how I think about it. This year will be hundreds of growers on thousands and thousands of acres. So it's bigger than small trials, small-scale field trials, but it's still sub-threshold in terms of commercialization. If you pan out to 2014, just to give you an idea on this curve, and I think this is, this may be not absolutely right, but it's directionally correct. If you think about 2014, we'd be on a 1.5 million, 2 million acres. So if you think the progression '12, '13, '14 we'd be in a couple of million acres by 2014 with these programs. The interesting thing for me is, when we look at these progressive sophisticated growers and the work we've done in the last 2 years, these are farmers, these are growers that are looking for that next increment but feel that they've maxed out. So that next increment is that they're stretching, but they can't see it. And the encouraging piece is, if you can unfold 8 to 10 new bushels on the front end of these growers through predictive systems, then as we build predictive algorithms and start to aggregate this data, I think this is a capacity growing pretty fast once we start rolling.
Our next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch.
Kevin W. McCarthy - BofA Merrill Lynch, Research Division
Hugh, I guess 2 questions for you on the subject of prospective seed pricing for fiscal 2013. First, is the contribution in terms of price mix likely to be larger for corn or soybeans or about the same for the 2 crops in North America? And then second, with regard to pricing and also in light of the really short volatility we've seen in the commodity complex the last couple of weeks, should we be thinking of your pricing decisions as wholly decoupled from commodity price volatility at this point or is there flexibility to move within the ranges that you've outlined?
Kevin, thank you. So I'll take a swing at this and then invite Pierre if he's got any add on. I think, we said this year we were about price gains of about 5% to 10%, and we kind of tipped our hats that we would be looking somewhere in that region coming into the new year. And I mean as the delicious irony of this business, we're worried about what the crop's going to be this year and when it's going to yield and we're already talking about pricing for the spring of '13. I think as a very rough guideline, 5% to 10% is probably a good touch point. There's probably a bit more strength in corn than in soy simply because of our technology offerings and the wide range of choices that we have and the technology breakouts in corn. Don mentioned Double PRO and the whole Reduced Refuge Family. And then your second point on commodity pricing, so you're right, corn's done a big run-up in the last week, $6.50 corn and December priced at $6.50. This is going to be all over the place. And I'd kind of take your point. I think we're largely decoupled and I wouldn't be holding your breath on us pricing against the big run-up or us cutting our price on some kind of slumps. I would -- I think growers look at us as a significant piece of leverage on optimizing yield regardless of where that pricing band sits. And the lesson that we've learned in a business that's seasonal and where we get rewarded for serving that grower year after year is, consistency is a big, big deal. And it's a big deal for our own organization, it's a big deal for the growers. So that's -- we're going to play in and I think more than we've – than we had been doing. But Pierre, any other points on price?
Well, 2 things, the first one regarding the point Hugh was making, I mean, regarding commodity prices, we don't price to commodity price every year. What we try to do is have a thinking that takes into account commodity price but over a period of 3 to 5 years. And that's really what we are trying to do when driving our long-range plans. And our strategy is pricing to a range of commodity price within which we can have the mix upgrades we're looking at. The second point I wanted to make regarding your specific question around the impact of mix versus the fuel price, once again, we're looking into mix being the key driver of our 5% to 10% price appreciation in 2013. So mix, the mix upgrade from our germplasm and from the adoption of the Reduced Refuge Family in the U.S. is going to be the key driver.
Pierre, at the risk of repetition, I'd just add one thing. Pierre made the point earlier, Kevin, we went into this year assuming 92 million and 94 million acres, and we went in this year with price assumptions of commodities of $4 to $6. I think as we sit here today and we think about next year, we're directionally in 92 million and 94 million acres again and our pricing would be $4 to $6. So that maybe kind of specifically addresses your concern. I think we would produce beyond that and the opportunity of a spike, but in terms of planning and budget and our mid-teens growth, we're not holding our breath for a blockbuster crop or gigantic prices.
So Lewis, this is Bryan. I recognize we're running tight on time. Maybe we have time for 2 quick more questions, and then Hugh will wrap things up.
Our next question comes from the line of Mark Gulley with Gulley & Associates.
Mark R. Gulley - Gulley & Associates LLC
My question has to do with the weather this year as well, with drought conditions and all that. As you talk to your grower customers and how they look at rootworm pressure and how they might alleviate some of the drought pressure because of they have more triple stacks, are you seeing a shift back towards triple stack corn, given the conditions that farmers are seeing the last 3 years, including this year?
No. So Mark, thanks for your question. I'd say what we're seeing is the continued progression of SmartStax. So if you look at where they're placing their bets, particularly where they've had high infestations, and particularly where they're reluctant to break cotton and corn because it's so profitable, they're moving more to SmartStax. And where they've been pushing us is increasing the range of hybrids and increasing the choice. So if I look at our -- the translation from order books to planting, that's where we've seen the growth. And I would expect -- you never know. But if you look at the long-term weather forecast, you look at what's playing out, I would anticipate as we go through harvest and in the back end of this year, that's where we're going to be pressed again is look for more of that.
Our last question comes from the line of Bob Koort with Goldman Sachs.
Robert Koort - Goldman Sachs Group Inc., Research Division
Appreciate the opportunity to not talk about European debt and Chinese industrial production. Hugh, you mentioned in the slide deck the progress you made on Roundup Ready 2 beans and the 3/4 penetration on your brands and needing maybe to get the licensees to catch up to you. What can you do to motivate them? And then how big of a hurdle is this, the patent expiration that's a couple years out now?
Yes. Bob, thanks for the questions. And I agree with you on a good culture is a good place to be right now. I think the biggest encouragement that we can give is the encouragement that we also receive. And that's the put from growers. So it seems like 100 years ago, but when we launched these platforms and you're in that first million acres, this is show and tell. It's all push. And there's skepticism because you're launching something that's never been seen. I think when you get to the size of these platforms, when you look at what we've achieved from a momentum point of view, this is the costly shops and this is growers talk to growers. And it's the old seeing is believing or the show me state, once you get to this point, it's never done is done. But there's a tremendous amount of enthusiasm, particularly with bean prices where they are right now. So the biggest encouragement we can give to licensees is yield differential and then performance. And this becomes the critical year with the amount of acres that we've got out there. So I -- you had a 2-part question, what was your other piece? Did you have another point, Bob? No? So that was it. And then the other piece I was going to add was dicamba. And there is tremendous interest for dicamba-tolerant beans. So as we look towards patent expiration, key for us was allowing growers the opportunity of seeing improved technologies early enough. And I'm delighted with the progress that we've made. And I'm looking forward to getting Ground Breaker trials out this next year on dicamba as well.
So maybe, Bryan, I'll just wrap up. We've run over a little. But I just -- let me thank you again for everybody that joined us in the call. The third quarter for us, ironically, is the last stopping point before we turn our attention to 2013. In many ways the year is done, and we start looking at '13. So let me just talk one more time about '12. We feel very good about 2012. We captured momentum in our business and we've put together back-to-back years that prove out that we are in a growth mode. I think that sets up the fact that here at Monsanto, our teams feel equally good about 2013. We'll continue our strategy and that gives us a clearer line of sight on our growth than we've had in some previous years, and that reinforces our confidence.
And finally, as we highlight our growth in '13, we're looking forward to giving you a firsthand look at some of the big drivers that we've covered today at our Whistle Stop event in August. And we all hope that many of you can make it and you'll get the chance to meet our talented people, many of them from our international businesses that will be there. And you'll see why we're so excited about the growth that we have in our global businesses.
So thanks very much for your support and being with us this morning. All the best.
Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
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