Monsanto Company F3Q08 (Qtr End 5/31/08) Earnings Call Transcript

 |  About: Monsanto Company (MON)
by: SA Transcripts


Ladies and gentlemen, thank you for standing by and welcome to the Monsanto third quarter 2008 results conference call. (Operator Instructions)

And it's now my pleasure to turn the conference over to Scarlett Foster, Vice President Investor Relations at Monsanto. Please go ahead.

Scarlett Foster

Thank you very much and good morning to everybody on the line. I'd like to welcome you to our third quarter earnings conference call, and I'm joined this morning by Hugh Grant, Monsanto's Chairman and CEO, by Terry Crews, our CFO, and by Brett Begemann, our Executive Vice President for Global Commercial Businesses. I'm also joined by Laura Meyer and Bryan Hurley, my colleagues in Investor Relations.

Hugh will be providing a strategic overview this morning followed by a commercial update from Brett and a financial review by Terry.

Given both our third quarter results and our revised ongoing full year guidance, this is shaping up to be another year of exceptional growth for Monsanto. Importantly, the results year-to-date are milestones that propel our growth through 2012.

Before we begin, I'd like to remind you that we're webcasting this call. You can access it at Monsanto's website at, and the replay is also available at that address.

For those of you would like to go to our website, the slides for this call are posted on the Investor Relations information page, and the page numbers are on the bottom right-hand side of each slide.

Additionally, on the website you'll see that we've published our annual Biotech Acreage projection. This is our preliminary forecast, which we'll update after the fourth quarter.

We're providing you with EPS measures on both a GAAP basis and on an ongoing business basis. In those cases where we refer to non-GAAP financial measures, we've provided you with a reconciliation to the GAAP measures on the last slide and in the earnings press release.

I need to remind you that this call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risks and uncertainty, the company's actual performance and results may vary in a material way from those expressed or implied in a forward-looking statement. A description of the factors that may cause such a variance is included in the safe harbor language contained in our most recent Form 10-Q and today's press release.

I'd like to start by asking you to reference Slide 4. Ongoing EPS for the quarter increased by 42% to $1.45 per share. For the nine-month period, ongoing EPS was $3.70, an increase of 70% from ongoing EPS for the first nine months of fiscal year 2007.

If you move to Slide 5, you'll see this year-to-date gain reflected in a 35% increase in total revenue and a 45% increase in gross profit. Seeds and Traits gross profit grew by 17% for the quarter, led by soybean seeds and traits. Higher levels of trait penetration in the U.S. and Brazil created the 33% growth for soybeans.

For the other key crops, gross profit increased in the mid to high single digits. For the year-to-date, Seeds and Traits gross profit was 26%, led by a 31% increase in corn. Soybeans and cotton both delivered gross profit growth in the low to mid teens for the first nine months of the year. Vegetables contributed a 29% increase in gross profit year-to-date.

Roundup, of course, led the gross profit growth for the Ag Productivity segment, with increases of 107% in the quarter and 145% for the year-to-year.

Margins overall reached 55% for both the quarter and the first nine months, reflecting the resurgence in Roundup. Margins for Seeds and Traits were down slightly at 60% and 62% for the quarter and year-to-date respectively. And Terry will discuss our margin structure in more detail shortly.

On Slide 6 you can see that we've now increased our EPS guidance for the year to approximately $3.40 on an ongoing basis, an increase of approximately 70% over full year 2007 ongoing earnings. We've adjusted our outlook for free cash flow to $550 million to now reflect the inclusion of the De Ruiter and Cristiani acquisitions and higher cash flows from operations.

We anticipate incurring our typical seasonal loss in the fourth quarter, and it is a quarter largely influenced by Roundup in the U.S. and cotton globally while still carrying the full quarterly load of SG&A and R&D expense.

Many of you have asked about the effect of the devastating floods in the Midwest, particularly in Iowa. While the flooding has been dramatic, keep in mind that for most farmers, the more pressing weather issue has been the colder, wetter start to the growing season. As we do throughout the year every year, we have continually evaluated our return and replant rates. We currently do not anticipate a material effect from level of returns and replants that we have already reserved in fiscal year 2008.

For 2009, the issue going forward for farmers and for us is first, the timing and conditions for pollination. We won't know for several weeks how this weather-related event affects final yields. The second date to watch is the potential for a later than normal harvest and thus, a frost risk. Part of the investment we're making in seed production facilities was done to provide enough capacity so we could harvest more quickly and mitigate the risk associated with frost. We believe we have enough high-quality carryover stock as well as the planned production that will be needed for what will likely be a larger corn feed market in 2009, and any adjustments needed to our plans would be handled through winter production.

So with that short overview, I'd like to turn the call over to Hugh, who'll be sharing his strategic outlook.

Hugh Grant

Thanks very much, Scarlett, and good morning to everybody on the line. As we close out what's been a truly remarkable nine months, we're another step closer, both in time and in performance, to reaching our target of more than doubling gross profit in 2012 from a 2007 base.

Just three weeks ago we also put another stake in the ground on another kind of doubling. We said through our breeding and biotechnology we can play an important role towards the goal of doubling the yields of corn, soybeans and cotton globally by 2030 over a 2000 base.

These are two sides of the same coin. We address the problems of agriculture through innovation and are thus uniquely positioned to contribute to the need for more grain. Because we bring innovation to the issues of productivity, we offer the most attractive solution for the farmer.

As a result, we're uniquely positioned at the point where innovation intersects with leadership. While others are asking should it be foods or feeds or fuel, we believe the answer is "and" and we've the solutions in hand to be a significant part of that answer.

So many will talk about innovation, but there's few who deliver it. For the last decade and more, we've relentlessly applied technology to boost productivity on every acre, and this year the result will be that 260 million plus acres were planted worldwide with at least one Monsanto trait. That's a 5% increase from last year, but this, of course, understates the effect of multiple traits on one acre.

In the U.S. alone, the number of corn traits sold irrespective of the combination of traits, covered something in the neighborhood of 140 million acres, an increase of roughly 15%. You can see these numbers today in our annual report of Biotech Acres, which is posted to our website. We're the only company in our space with the R&D and commercial wherewithal to be able to consistently publish a chart with such breadth and depth.

I think this chart underscores that while many talk about creating value, few demonstrate it. Because of our unprecedented performance on [farm], we've earned a significant share of the farmer's annual investment, and that in turn has given us the privilege to again lift our ongoing earnings guidance for fiscal year 2008 to approximately $3.40 per share on our path to more than doubling our gross profit in 2012.

For a corn crop that's been late to plant and stressed in its early days, the speculation on what to expect for the next growing season is louder earlier than we've ever heard before. The honest answer, of course, is that nobody knows and won't until the last combines run through the fields this fall. Planted acreage for the 2009 season is likewise impossible to predict.

Our working estimates right now are for a U.S. corn crop of approximately 90 million acres, soybeans around 70 million acres, and cotton in the range of 9 million acres. Let me emphasize, however, that the odds are very high that we'll be wrong, but because we're a technology play, we're spending our time today on the value that we'll deliver because of the strength of our innovation and not on what might happen because of the toggle between corn, soy and cotton acres.

So when people ask me what keeps me up at night, my answer's always focus and execution. Over the next 12 months, I predict that there'll be more column entries written about corn and soybeans than there will be acres planted.

In that environment, let me step back from the noise and share with you where our three focus areas will be.

Number one, we're going to drive growth and extend our leadership in Seeds and Traits. If you refer to Slide 7, in 2009 we'll mine the sweet spot of market share growth, trait acceleration and pricing for value. We'll again target a 1 to 2 point market share increase in each key corn growing country. The only exception to this will be the U.S., where our head start in corn allows us to lift our 2009 market share target to the 2 plus range for DeKalb and a 1 of market share gain in ASI.

We delivered 28 million acres of Monsanto triple-stack in the U.S. market in 2008, with some 60% of our DeKalb and ASI brands sold as a triple-stack. In 2009, as we show on Slide 8, our goal is to lift the percentage of triple-stack traits in the DeKalb portfolio to roughly 65%. In a very interesting positive dynamic, we also could see the percent of ASI triples reach above 65%.

There are 45 to 55 million acres of triple-stacks that we believe can be sold in the United States. If you took the market share and triple penetration of our brands and of our licensees, we see a path to planting some 34 to 35 million acres in 2009 with the Monsanto triple trait package. Said another way, we are aiming to reach our peak potential of the total available market next season. This, in turn, gives us the broadest possible footprint for the coming launch of Smart Stax in 2010.

We crossed several pivotal milestones in the last two weeks related to Smart Stax. First, we received U.S. EPA clearance for YieldGard VT Pro, our second generation corn borer trait that's one of the cornerstones of Smart Stax. The YieldGard VT Pro approval grants the first reduced refuge for a corn trait in the United States. as a result, the refuge will drop 20% in the Southern region from the 50% levels acquired for first generation traits, and the EPA is now considering a reduction to 5% for the primary corn belt.

Secondly, and again last week, YieldGard VT Pro was also approved by Canadian regulators, who granted a refuge reduction on all acres down to 5% from the previous 20. The final step to the 2009 launch of YieldGard VT Pro is the pending approval from the USDA.

Our third milestone was the official regulatory submission of Smart Stax itself. We're the first to file a regulatory package and the first to formally request a refuge reduction for this type of product. We also intend to be the first to bring this kind of superior performance and yield enhancement to farmers.

So, secondly, we'll continue to drive and differentiate ourselves through innovation. In 2009, we'll introduce the first of our game-changing platforms and the first new innovation in soybeans in 13 years with Roundup Ready 2 Yield, as noted in Slide 9. Our controlled commercial release will allow farmers to experience on 1 to 2 million acres a game-changing technology that's arrived on time, as promised, and with unprecedented value to the grower.

We hope to take the same type of yield revolution to Brazil. Insect protected, Roundup Ready 2 Yield soybeans will be the first stack trait combination in soybeans and the first product ever developed in the industry specifically for the Latin American market. Given that it's in Phase 3 of our pipeline, this product should be commercial around the end of our 2012 plan.

Certainly, we'll continue to return value to shareowners in multiple ways as we illustrate in Slide 10. Within the last week we've announced a 37% increase in our dividend. We also closed in the acquisition of the De Ruiter vegetable seed business from the Netherlands and announced our intent to purchase Cristiani, the number one Central American corn and seed company.

We've been creating the footprint for success in Latin America long before biotech traits were approved, and we've just snapped the last piece of the puzzle in place. The Cristiani acquisition gives us the complete footprint in Latin America, adding the leading positions across Central America to our number one positions in Argentina, Brazil and Mexico.

As we have with other seed acquisitions, with Cristiani we've expanded our germ [inaudible] library, upgraded our channel reach with an additional 900 distributors, and created the leading seed position all prior to the launch of biotech traits.

I think we're unique as a technology company in our ability to generate significant levels of free cash, and we're equally unique in our ability to deploy it across a range of options. I think it's, again, a measure of our ability to widen the competitive gap that we constantly expand the global footprint for technology and reach for the opportunities that are to come, not the ones that have already happened.

So in short, here's how I think about 2009 as the springboard towards 2012. The pattern that we've established, whether it's in biotech or breeding, is to make the first R&D breakthrough, be the first to bring it to market, and then aggressively explode that new technology to farmers around the world. We're not mired in playing catch up. We're obsessed with being a pacesetter. Our strategy I think's accelerating and our opportunities are expanding, and we control our own destiny. If we succeed in this, we'll put increasing distance between us and the competitive response.

So with that, I'll now turn the time over to Brett to translate this theory into execution and then on to Terry, who'll tell you how this shapes up in our financial outlook.


Brett D. Begemann

Thank you, Hugh, and good morning to everyone on the line.

Hugh talked about finding the sweet spot. The fascinating part of my job is that I work with people who search for that point with amazing intensity day after day in every part of the world.

The execution may be different, but the focus is the same - maximize profitability by growing seed market share, expanding trait penetration, and capturing our fair share of the value, and do all three at once. The trick is you have to have the performance to back it up.

We met our commitments against several important metrics in the U.S. this year. First, we saw market share growth in both DeKalb and ASI. We topped our trait acreage targets for each of our products in corn and delivered a nearly 60% expansion in triple-stacked corn trait acres. All of this was done while trait prices rose in line with the value they delivered on farm.

While the 2008 harvest and the 2009 acres are still wildcards, our plan is to replicate that sweet spot globally, particularly in the Americas because of the value our technologies deliver to farmers.

We are again challenging the organization to grow 2009 corn market share in each key country by 1 to 2 share points. In the U.S., we've raised the bar with a target of 2 points or more for the DeKalb brand and 1 point increase for our ASI brands in total.

In the U.S., we expect that at least 65% of everything we sell in one of our brands will be a triple-stack. In Argentina, we are targeting 40% of everything we sell in DeKalb to be a double-stack. And in Brazil, we have planned for 20% or more of everything we sell in DeKalb and Agroeste to carry the YieldGard corn borer trait.

As we deliver more value to more farmers around the world, we're running ever more sophisticated models that match pricing to the unique conditions of each country. Our goal is the sweet spot - drive penetration, grow market share, create greater value, and share that value with the grower.

The answer may be different country by country or zone by zone, but there's a massive amount of experience and data that allows us to tailor our pricing so that the farmer receives maximum value while we're rewarded for innovation in the field.

This time of year there's a lot of pent-up anticipation about pricing in the U.S. As I think about pricing, let me offer several highlights, as shown on Slide 11.

First, we've expanded our zone-based pricing model from three zones to seven. Our zone-based approach matches the pricing of our YieldGard traits to the intensity of insect pressure and as a result to the differences in the value the farmer receives. We believe the expanded zones will give more farmers the chance to use the triple-stack more economically. By creating a better match between price and value, we've provided an incentive for lower adopting areas to move to triple-stacks. This is critical, of course, ahead of the launch of Smart Stax and a good barometer of how we'll think about Smart Stax pricing.

Second, while prices will vary across these seven zones, our average price per traits offered in DeKalb will increase for each of our trait combinations. That value not only is shared with the grower but also with the distribution channel for our branded seeds.

Third, if I focus on that all-important triple, the weighted average price accounting for projected sales volumes across the seven zones will increase slightly more than 20%. In 2008, our best triple-stack combination -- YieldGard VT Triple  sold for $29 to $36 per acre. In 2009, on an absolute basis, YieldGard VT Triple will be in the range of $29 to $49 an acre.

Fourth, the comparison of the ranges makes a critical point. Embedded in these numbers is a carefully targeted pricing approach designed to match our value proposition to the farmer's personal experience. While overall trait pricing will increase on roughly 60% of the U.S. corn acres that we compete for, it will be flat to down on the remaining 40%. The difference reflects the value of selling unique technologies that can be priced to fit rather than a one size fits all approach.

Finally, while we have yet to announce the specific pricing for underlying seed in DeKalb, our fundamental pricing approach will be the same. We will look at the incremental yield that's embedded in the seed, price that against a historic commodity look, and then share that value. By refreshing some 15% to 20% of the portfolio each year, our new, higher-value hybrids will lift the mix in our portfolio.

If you want to find the same sweet spot in soybeans that we're creating in corn, you need only ask the farmer. As I speak with our customers, the most frequent question I get is: When are you going to do for me in soybeans what you've done for me in corn?

The answer, of course, is Roundup Ready 2 Yield, as we show on Slide 12. Soybean breeding has delivered something on the order of a half a bushel per acre in annual yield gains historically. With a 7% to 11% yield gain with Roundup Ready 2 Yield, farmers will get up to a decade's worth of breeding gains in a single step change. That's real value that has a direct affect on the farmer's bottom line.

We're still completing our final pricing analysis for Roundup Ready 2 Yield, and we'll announce that later this summer along with our soybean seed pricing. That said, I can tell you that we think about pricing to value the same in soybeans as we do in corn.

Just as an example, an average 3 to 5 bushel an acre advantage using a $9 per bushel commodity price creates something on the order of $27 to $45 of incremental yield value. While we have not determined the final pricing, this gives you a feel for the value created beyond the current Roundup Ready varieties. As we do in corn, we'll look to share that total value package with the farmer in the range of one-third to one-half to Monsanto.

As Hugh mentioned, we expect to have 1 to 2 million acres of pre-commercial seed in the marketplace in 2009, with a full launch of 5 to 6 million acres in 2010. We have roughly 40 seed companies in position to offer Roundup Ready 2 Yield next year, and by the time we launch commercially in 2010, roughly 200 seed companies will have the opportunity for a license to sell the product. Our target market is 40 to 50 million acres, and if Syngenta exercises its option to Roundup Ready 2 Yield, that target would expand by roughly 10%.

Behind our pricing actions is the basic philosophy that we add value for the farmer through innovation.

First, new technology rewrites the historical assumptions about yield. That's exactly what we're doing with Roundup Ready 2 Yield.

Second, new markets open to technology. That's what we believe is happening in Brazil and Argentina and will ultimately occur in Central America.

Third, innovation is rewarded for the value created. This has been true in the U.S. and will become more so given the lead we've established on the path to launching Smart Stax.

You bring these together and you have a powerful commercial engine and a model that works globally. It's one that's independent of the commodities cycle, that's built around high-margin technology, and that still has most of its opportunity ahead.

I feel very good about what we've accomplished in 2008, but I feel even better about our commercial opportunity in the next fiscal year and how that sets us up through the middle of the next decade. How well we do depends on focus, execution and finding the sweet spot around the world.

So with that, let me turn the time over to Terry.

Terry Crews

Thank you, Brett, and good morning to everyone on the line. Hugh and Brett have just shared with you some of our key commercial achievements for this year and have provided some of the strategic priorities for fiscal year 2009. As they both mentioned, we are at the intersection of innovation and leadership, and our earnings and cash generation should reflect that level of excellence. Fiscal year 2008 has been no exception.

If you would turn to Slide 13, our Seeds and Genomics gross profit growth for the quarter and the year-to-date was delivered across all crops. Trait penetration rose in corn and soybeans, and nearly 60% of the U.S. cotton trait market planted the double-stack of our second generation traits. Brand share increased in corn, led by growth in Argentina and the U.S. Trait prices increased in corn in the U.S. even though there were fewer planted acres. Vegetable seed gross profit lifted from higher pricing and the absence of onetime events that negatively impacted 2007.

The result was an increase in gross profit of 26% for this segment for the first nine months of this year. Our new ongoing EPS guidance for the full year of approximately $3.40 assumes $3.7 billion of gross profit from Seeds and Traits. This would translate to growth for the full year of 23%. Clearly, we're well along the path of delivering the $6.5 to $7 billion of gross profit from Seeds and Traits we've targeted for 2012.

As Scarlett mentioned, we continued to deliver margins in the 60% range for the quarter and year-to-date for this segment, but we were slightly off our pace from prior years.

Three factors created the margin dynamic in Seeds and Traits. One, seeds are growing at an unprecedented pace in our portfolio, particularly for corn and cotton, and that increase has had a mixed effect on margins. Two, we're managing a more volatile commodity price environment in our seed production overall, and this put particular pressure on our soybean margins this year, as we mentioned last quarter. Three, resolution in this quarter of the Syngenta litigation and some royalty disputes related to underlying technologies have had a one-time effect on corn gross margins.

This equated to a reduction in corn margin of one percentage point in the quarter and just under a half a percentage point year-to-date. Without those items we would have expected corn margins to grow by half a point for the full year where we now believe they will be about flat.

While the margin effect is unfortunate, we will always trade the value of long-term certainty for our business for a small one-time effect on margin growth.

All that said, and to put the margins in perspective, our corn gross profit increased by $480 million, a onethird lift from this time last year.

As we look forward to 2009, we would anticipate margin lift in corn from an accelerated trait penetration, goals that Brett laid out for the Americas. In soybeans, we look to return to more historical margins for fiscal year 2009 as we intend to hedge nearly 100% of our planned production and have given ourselves some greater flexibility in the timing of our seed pricing. Soybean expansion throughout the Americas, particularly the pre-commercial launch of Roundup Ready 2 Yield, should add to soybean margins and reset the competitive bar on that franchise.

We would expect to see improvements in our cotton seed business. As [inaudible] stabilizes, we upgrade U.S. cotton portfolio that we offer with second generation traits and improved varieties. Layered on that will be the continued expansion of Bogart 2 in India.

Our vegetable business should continue to deliver top line growth given our infusion of technology and expansion in the protected culture business.

We're poised to deliver targeted margins in the range of 65% in 2012 from today's projected base of 53% for 2008.

The turnaround in Roundup continued this quarter, and we provided some historical context on Slide 14. Gross profit for the quarter more than doubled from last year, and we expect the full gross profit contribution for Roundup to now be approximately $1.9 billion. This improvement assumes low single-digit volume growth. We anticipate that we'll sell nearly 255 million gallons for the full year, with branded prices just above the band that we highlighted last quarter of $16 to $18.

Looking forward to fiscal year 2009, our initial forecast is that the Roundup business can deliver gross profit in the range of $2.1 to $2.2 billion. The capacity expansion in our Luling facility will not be completed in time to ease supply constraints through 2009. In the longer term, we still believe this business will deliver in the range of $1.8 billion in 2012, with some ups and downs around this estimate in the intervening years.

As we close out this year there are still a few items that we're watching. Final seed returns in the U.S. are due later this summer. As Scarlett said, we believe we'll be able to handle any additional adjustments within our new guidance. The timing of corn seed sales may also be an issue in Argentina as farmers may hold off on purchases as they wait for resolution of the government tariff issues there, so we're assuming there could be some shift into the first quarter of 2009 from what we would have typically seen in the fourth quarter of this year.

For the full year, SG&A as a percent of sales is expected to be in the 20% range, while R&D is now expected to be just below the 9% range.

We continue to target receivables in the mid-teens, and the inventories now are expected to be flat on a percentage basis with last year at roughly 20% of sales.

Our tax rate for the full year is now targeted at 29% to 30%. In the third quarter, the effective tax rate was 26% versus 29% in the third quarter of 2007, and this benefit relates predominantly to the reversal of a valuation allowance in Argentina. As you look to the fourth quarter, keep in mind that last year's fourth quarter included approximately $0.10 tax benefit which we will not replicate in this coming fourth quarter, and our earnings will reflect this higher tax cost.

Turning to free cash, our projection for the operating cash flow is now increased to $2.6 billion for the year. This improvement is driven by continued growth in earnings and includes the cash of $163 million received under the Solutia settlement. So even with the De Ruiter and Cristiani transactions, we anticipate that we'll still deliver $550 million of free cash flow in fiscal year 2008 after these acquisitions.

Capital spending for the year remains in the range of $950 million as our projects are on track to expand glass assay production at our Luling plant and seed production capacity in North American.

Cash used for investments outside of capital spending has been increased to just over $1.1 billion to include the De Ruiter and Cristiani seed acquisitions. De Ruiter closed for approximately $850 million, including the net debt that we assumed, and Cristiani's expected to use an additional $135 million and we're anticipating that we will close this in the fourth quarter of this year.

Finally, we continue to make progress on our current $800 million share repurchase plan, with nearly $450 million or 57% of our authorization repurchased through the end of our third quarter. A second authorization for an additional $800 million will begin at an earlier date of October 2009 under the completion of this first plan. The second plan has a faster timeframe and is targeted to be completed in three years.

As Hugh noted earlier, we have again raised our dividend nine months after the last increase and this time by 37%. So we have nearly doubled the dividend over the last 18 months.

Set on a backdrop of nearly 70% growth in ongoing EPS in fiscal year 2008, we're well on our way to our target of more than doubling our 2007 gross profit in 2012, as shown on Slide 15. We'll update our 2012 commitments for you in the fourth quarter, particularly for gross profit by segment, along with our guidance for 2009. At that point, all returns for the U.S. will be in, and we'll have an early read on the timing of our Latin American corn and Roundup businesses. From there, we can firmly establish the base for 2009 and apply that to our growth projections through 2012.

Our performance in the third quarter continued the trend that began with the first two quarters and culminated in a year-to-date gross profit of $5.3 billion, a 45% growth over the first nine months of last year. Our six growth drivers continue to deliver and underpin our strategy going forward.

At the same time, we're continuing investment in the next generation of traits and yield [in stress], whose first product launches set just outside the perimeter of this plan. Our innovations in drought tolerance and nitrogen utilization will reset the financial opportunity for us once again and will do so on the footprint that we are creating today and are investing in today.

With that, I'd like to turn the call over to Scarlett for question.

Scarlett Foster

We'd like to go ahead and open the call to your questions. And I'd ask that you please hold your questions to one per person so that we can take calls from as many people as possible, and you're always welcome to rejoin the queue for a follow-up question.

So if we could go ahead, please.

Questions-and-Answer Session


(Operator Instructions) Your first question comes from Jeffrey Zekauskas - J.P. Morgan.

Jeffrey Zekauskas - J.P. Morgan

Over the past two years your corn seed growth has really been quite spectacular, and last year you were up 57% with no quarter below 35%, whereas in this quarter the growth rate in corn seed revenues was a little less than 10%. Can you just talk about what was different about this quarter than the previous, oh, I don't know, five quarters?

Hugh Grant

Jeff, thanks for your question. I'll maybe begin, and I'll let Brett say a few words.

But I'd begin by saying we're delighted with the continued growth in our corn business. We're looking at a performance track where we've brought in nearly $500 million more gross profit in corn, and we've exceeded both our technology penetration goals and overall share growth goals not just in the U.S. but around the world, so I'd say your point on where we are this quarter, I'd say if you look over the last three or four years we've seen phenomenonal growth and this last couple of quarters is no exception.

Jeffrey Zekauskas - J.P. Morgan

So what was different about this quarter?

Hugh Grant

Terry, maybe you want to say a little bit on the margins.

Terry Crews

So the dynamic that's happened, that's changed the effect between quarters is that as we've grown our share we end up having more of our earnings associated with corn booked in the first half of the year because, as you might recall, our normal pattern is that when we actually ship the corn we book the corn seed and the trait.

In the past we've had a lot more from licensees, which is showing up in the third quarter, and that's why we saw a 45% capital growth curve for the first half of the year, with a lot of that coming on our seed side. So it's the growth in our seed share that's shifting the timing of when those margins hit, so typically more toward the first half of the year than in this third quarter.

Jeffrey Zekauskas - J.P. Morgan

I mean, basically, you had the same pattern last year where your growth in corn seed was 35% in the first quarter, 47% in the second. This year it was 30% in the first and 47% in the second? I don't mean to - it just seems that something different happened in the quarter. Your performance has been excellent.

Terry Crews

No, it didn't. It's just growing off a larger base now, so we're just growing off of a larger base in those first two quarters. So if you look at absolute dollars added, we're still improving in the first half of the year, and we're still seeing that shift continue.

And there's also a little bit of an effect as well that we're seeing from Latin America as we're seeing some growth there that's occurring. And essentially no Latin America in the third quarter.


Your next question comes from Michael Judd - Greenwich Consultants.

Michael Judd - Greenwich Consultants

Scarlett alluded to some of the impacts from the colder weather in the past quarter. Can you help us understand how that's going to impact the mix of profits in this particular quarter, whether it creates opportunities or are there things that got booked last quarter that won't occur this quarter or vice versa?

Hugh Grant

I'll maybe just say a few words and then ask Terry to say something on replants and how we true this up.

But the short answer is we don't see any appreciable or material impact on the quarter. It's a tragedy what's happening out there. There's been a lot of coverage on the flood. Scarlett pointed out the bigger impact, and it will probably show through in depressed yields as a lot of the crop went in wet, cold ground and it's still struggling to catch up.

But maybe the financial treatment of that, Terry?

Terry Crews

Well, I'll make two comments on it. First of all, in the mid-80s of acres or wherever we may end up in corn compared to where we were last year, obviously our returns and replants are going to be higher than where we were last year. But we think we've taken that into consideration already in the reserves that we've established through this quarter, so I would not expect to see much of a deviation from returns and replants when we move into the fourth quarter.

The other comment I would just make about this is that, when there is a replant, we don't book a second technology fee. So there's a modest increase in revenue, but it's not much of a profit impact for us. So in the case of replants, we really don't see a lift due to replants. We see a little bit of a lift in sales, but no lift really in gross profit, therefore it could pull margins down a little bit.

But having said that, I believe that number's still going to be small enough it's not going to be an effect for us for this year, and I would not anticipate a fourth quarter event either way, either positive or negative, as a result of what's happening right now in Iowa and other parts of the Midwest.


Your next question comes from P.J. Juvekar - Citi.

P.J. Juvekar - Citi

Your seed and general mix margins declined 400 basis points from last year, and in fact they were lower than Roundup operating margins for the quarter. I was wondering if you can explain sort of the changes in margins that are taking place.

Hugh Grant

Let me just start. I understand your question on margins, P.J. Let me just try and put it in some context. It kind of links to the first one, so we're going to close out - if you look at absolute return, we're going to be close to $500 million up in gross profit in our corn business. We've seen really stellar growth yet again in the corn business. And those two impacts have really been driving margin.

Ironically and it's kind of what Terry was saying earlier, we're almost a victim of our own success because we've seen the whole platform grow and the seed piece of that, the genetic footprint, continuing to drive ahead. And as the seed piece grows, it tends to dilute the margin on the biotech side.

So you get that in one side of the house, and then in the other side of the house we made two small settlements that landed both in the same quarter. One was the clean up on the Syngenta litigation and the other one was a close out on a technology provider, and the consequence of them and our base seed growth resulted in some margin dilution. But I would, you know, compared to half a billion of gross profit growth, I would take the hit any day of the week to complete out 2009.

But Terry, maybe you've got something to add there?

P.J. Juvekar - Citi

Could you just expand those two things that you talked about, the Syngenta thing and the litigation? What was the impact of that, Terry?

Terry Crews

So, I mean, what we said is that there's roughly 1% margin effect based on the effects of the litigation settlement as well as some resolution that we had on some disputes on some underlying technologies. But you have to put that 1% in the context of the size of the quarter, so that would represent about $12 million of change, which just gives an indication to how small a number we're talking about that's creating these margin deviations that seem to be concerning people. The reality is if you step back and look at what we're growing from, it's we're just growing off of a larger base and we're actually adding more gross profit dollars.

Maybe it helps if I put in perspective how I would think about this for 2009. When you think about what lifts margins in our Seeds and Traits business, what really lifts margins as the driver is when trait penetration results in trait margins that are higher percentages of our total sales. And when we look at our plans and our margins growth, what we assume is continued trait penetration would in fact drive those margins up because pricing on traits typically come with a commercial program, so pricing going up doesn't really change the margins that much. It's really the mix in traits.

The really good news that we've had in our business is that our seed sales have lifted correspondingly with that trait increase. So while we've hit all our trait objectives -- in fact, we've exceeded our trait objectives -- we've more than exceeded on the seed side.

So what we haven't seen is we haven't seen a mix shift between seeds and traits, and that's why the overall dollars are lifting substantially but the margin doesn't change much.

And I think that's probably the dynamic that isn't quite so clear when you take a look at the numbers from a total corn perspective.

P.J. Juvekar - Citi

So the seed sales are higher than you expected, which is [inaudible] the margins.

Terry Crews


Hugh Grant


Terry Crews

Right. So if you go back and look at where we said in 2005 when we talked about our margin lift in Seeds and Traits, which is largely corn -- we've got some anomalies in cotton and soybeans which I could address, but largely in corn -- when we look back and we talk about a 1 to 2 share point growth between 2005 and 2010 and now take a look at what our share growth has been during that timeframe not only here in the U.S. but outside the U.S. in Argentina, Europe and in key counties in Asia and in Brazil with the addition of Agroeste, you can see now that corn seed is becoming a bigger part.

So in some ways while margins look like a concern, the reality is we're lifting our seed business as big as our trait business. They're kind of growing at the same rates now. As a result, margins are staying kind of flattish, but the overall dollars are actually going up.

Hugh Grant

As our footprint expands.


Your next question comes from Peter Butler - Thornhill Investments.

Peter Butler - Thornhill Investments

Have you gotten the test plot results from the Southern Hemisphere, and was there anything instructive or any significant plusses or minuses?

Hugh Grant

Still a little bit early for that, Peter, so the short answer would be not yet, but we think expectantly.

Peter Butler - Thornhill Investments

Okay, thanks.

Hugh Grant

Thank you. We'll update you when we get some news.


Your next question comes from Mark Connelly - Credit Suisse.

Mark Connelly - Credit Suisse

Hugh, you talked about Cristiani being the last important piece of the Latin American build out. When you look at the pace at which, you know, the GM expansion around the world can continue, are there still big acquisitions or internal growth in your sales organization that have to happen elsewhere? I'm just wondering how much we should be expecting in places like Eastern Europe and otherwise.

Hugh Grant

You know, in the winter of 2007 we said we would double our business by 2012, and that didn't anticipate - it wasn't predicated on major acquisitions. So, you know, to the previous question, we're looking at gross profit in our Seeds and Traits business moving from $3.75 billion this year to $6.5 to $7 billion by 2012, and that's driven largely by organic growth and pricing against our new technologies.

Having said that, the Cristiani deal and the Agroeste deal in Brazil late last year are great examples of buying into genetic footprints in the anticipation of biotech coming. And I think there's still opportunities as you look at other parts of the world. I'm not sure it's the U.K. and Russia, but I think in some of the emerging markets, given the demand for grain, there's real opportunities in driving yields through better seed and improved biotech.

So, you know, Europe, Asia are continued obviously targets, but maybe Brett, I mean, you're spending a lot of time traveling around the world. Anything to add to that?

Brett D. Begemann

Just one small point, Hugh. As I do have the opportunity to get out in the various countries around the world, you know, it's clear that the interest in increasing productivity around agriculture is getting a lot greater voice today than it has in the past. And as we see that opportunity continue to expand, it also means, to Hugh's point, the fastest way to do that is with genetics and technologies that we already have in hand.

And if a quicker way to do that is in participation with somebody that already exists in those areas of the world, we've demonstrated over time that we're clearly willing to do that, whether that be through a licensing model or whether if that means combining with a company that already exists in a position in that country.

And we continue to look in those areas, specifically, as Hugh in said, in Asia and parts of Europe, for those opportunities to come along. And if they do, we'll be prepared to participate.


Your next question comes from Kevin McCarthy - Banc of America Securities.

Kevin McCarthy - Banc of America Securities

I'm pleased to see you plan to increase the triple-stack corn trait prices by at least 20% next year. Would you also comment on whether or not you see opportunities to increase trait pricing for Roundup Ready 1 soybeans and over on the cotton side, do you see opportunities for price increases there or should we think about you as more focused on rebuilding share at this point?

Hugh Grant

So I'll maybe ask Brett to comment on both of those, Kevin, and maybe just use the opportunity to headline the fact, as we look at these crops and we look at new technologies, our main focus has been pricing the value we create in those.

So Brett, maybe you could say a few words.

Brett D. Begemann

I think as we look at it, the model that we've used for corn extensively is the same model that we use for soybeans and cotton, looking at the replacement value that a farmer benefits from from our biotech products, looking at the intangible benefits of convenience and better performance that a farmer sees, and then ultimately the yield benefit that they get.

And to your point, we're going to increase our corn traits, the triple-stack, by an average of 20%, but if you look at the high end of that range, in the high end of that range we're actually going up 35%, so a significant improvement there.

As we look at Roundup Ready 1 soybeans, we've not done our pricing yet for soybeans for 2009. We're constantly looking at the same or similar models for soybeans that we look at for corn. We'll again take into consideration the impact of replacement value, the convenience factors, the yield factors, and that'll all go into that model as we ultimately end up pricing.

When we look at cotton, I think one of the more significant things to point out in cotton, as we've seen the increase in commodity price for corn and soybeans, cotton hasn't been on the same trend line of increasing as we've seen in corn and soybeans. And you're seeing the acres in cotton go down the last few years, and as those go down, it varies the percent of those cotton acres that are in the high-value, high-productivity levels of the mid-South versus what you find in the lower production areas in Texas.

That said, we will use a similar model in cotton that we use in corn, with the focus being not only looking at it from a rebuilding our share base there but also our trait penetration and the overall value that's created for the farmer. And those pricing models are work that's going on right now for both Roundup Ready 1, Roundup Ready 2 Yield as we look at the future, and for cotton.

Terry Crews

Kevin, I might just add I think the key for us in cotton is to drive to the double-double, so we need to get the right portfolio that we've got into that mix that Brett just discussed.

Kevin McCarthy - Banc of America Securities

Just to follow up on that a little bit in soybeans, do you plan to use a seven-zone system in soy, and are your acreage forecasts for Roundup Ready 2 consistent with what we heard previously or do you see any opportunity to sell more in that market? Just wondering why you haven't determined the pricing at this point for soy.

Brett D. Begemann

You know, we don't have a pricing zone approach within soybeans. The model runs the same way, it's just [zone] applied into the various zones across the market. Because keep in mind, then, in soybeans the primary value is in the substitution for other herbicide systems that a farmer could use as well as the convenience of the Roundup Ready system and overall performance. So we don't look at it across the various zones in the same way that we do for corn.

Scarlett Foster

The reason we haven't done pricing yet on soybeans is we're giving ourselves some additional flexibility on the pricing, and that will be something that we'll announce later in the summer along with the price for Roundup Ready 2 Yield. And right now we're projecting about 1 to 2 million acres of Roundup Ready 2 Yield, and that's been fairly consistent.


Your next question comes from Laurence Alexander - Jefferies & Co.

Laurence Alexander - Jefferies & Co.

I wanted to follow up on the zone-based pricing strategy. Can you give some discussion on how you see that effecting mix effects over the next couple of years, either in terms of increasing volatility for mix effects or tilting the margin depending on how you're penetrating particular markets?

Hugh Grant

I don't anticipate it's got much impact in [inaudible]. Terry?

Terry Crews

I wouldn't expect much of an effect on that because the ultimate effect of zone-based pricing is it just differentiates the pricing model to match the value that it's bringing to farmers in various zones. And since it's largely the technology component of the pricing, then those margins are pretty similar. So there's a program that goes with that. It's a marketing program. So you see a similar lift in pricing, but you see a lift in the sharing as well. So we end up with not much of a margin effect.

The reality, though, is we bring more dollars in and we get some more acres. And if those acres drive additional corn share for us you could see a little bit of an effect, but that's still a very good outcome for us because we're driving more dollars into the bottom line and more people are getting the opportunity to enjoy the technology that we offer.

Hugh Grant

And I guess, you know, time will tell, but it's got the potential to expand the [inaudible] as a result of that because you've got farmers accessing the technology perhaps for the first time. I don't see a big mix effect, no.


Your next question comes from Mark Gulley - Soleil - Gulley & Associates.

Mark Gulley - Soleil - Gulley & Associates

I was intrigued by the fact, Hugh, that after many, many years of share gains in North American corn you're actually upping the share gains you anticipate for fiscal '09. So can you expand on that a little bit? It sounds pretty intriguing.

Hugh Grant

Yeah. No, that is true, and we -- based on our performance this year and the feedback that we're getting from the field, we've upped our estimates and we've done a bit earlier than normal, so it's kind of unique because, you know, we're a long way from harvest this year and we're anticipating performance in the following year. But I think it's a reasonable assumption.

Maybe I'll let Terry just add a few words to that.

Terry Crews

I just would comment, Mark, it really is representative of what we've seen from our history for the last three or four years. If we go back to 2005, we talked about a 1 to 2 share point growth, which would have been roughly 6 shares between then and where we're at now, yet we've grown our share about 17% in combination of organic and some ASI acquisitions.

So I think it's just the recognition that this is the trajectory we're on, and we feel confident in delivering 2plus share next year in the U.S.

Mark Gulley - Soleil - Gulley & Associates

Then as a follow up, it seems to me the triple-stack performance is usually best demonstrated under dry conditions. We don't have that this year, so are you concerned, particularly the zone-based pricing perhaps, that if the benefits of triple-stack aren't as apparent this year as before, is that one of the reasons that you're going to zone-based pricing? Are you a little bit concerned about the continued penetration of triple-stack given the wet rains and all that?

Hugh Grant

No, the zoning is not a response to that. The zoning's a response to opening access across a much wider front.

But specifically the question on triples and performance, Brett, what are you hearing from the field?

Brett D. Begemann

As you look across the market, we have had years where there were dry pockets and the triple-stack performs incredibly well. But at the same time, every year we look across the entire market and see how the triple-stack performs across the entire market. When you look at the phenomenonal penetration we've had of triple-stack, it's going up in significant ways in areas that weren't dry as well.

And that's driven by in some areas in a year like this year, where we may not have dry areas and we don't know that yet because we're a long ways from harvest, but it's likely that there'll be significant bug pressure and the kind of conditions that we're having leads to bug pressure. And that's the beauty of having a plat that is totally protected from bugs above and below the ground as well as the best herbicide system out there. It doesn't matter what kind of a year it's faced with, it's going to be the top-performing corn in the cornfield. And that's the confidence that farmers are starting to get in the triple-stack, and that's why we see the continued penetration and acceleration across the broad based part of the marketplace.

And just to add to Hugh's comment on the zone, the zone change has nothing to do with this phenomenon. What is more important is that it allows us to position it effectively across the entire market, creating just a tremendous platform for the launch of Smart Stax in 2010. So we're incredibly well positioned with the triple-stack across the entire market, not just the high pressure market, to launch Smart Stax.


Your next question comes from Robert Koort - Goldman Sachs.

Robert Koort - Goldman Sachs

I was wondering if you guys could just comment a little sort of what the philosophy will be on Roundup Ready 2, how you ensure rapid adoption while you wean farmers off Roundup so there'd be an incentive from a pricing standpoint where you raise prices much more aggressively on Roundup to get Roundup Ready 2 adoption, and how far would we have to go in the future, do you think, to where you would have no Roundup Ready and only Roundup Ready 2 in the product portfolio?

Hugh Grant

As we mentioned earlier, Bob, we haven't rolled this yet, you know. Scarlett said we'll be doing this later in the year. We're wrapping up focus group work now, but the general premise in this is it yields more. Farmers, particularly at commodity prices today, farmers are chasing yield, and we will share the instrument of yield that we produce.

And I think that's going to be the draw through that flips people from 1 to 2. My guess is with only 1 or 2 million acres available in the first year, that's going to prime the pump nicely in 2009.

But Brett, again, you got anything to add to that?

Brett D. Begemann

Just a small point. I think as I have the opportunity to meet with growers that grew some of the Roundup Ready 2 last year and their interest in doing it again this year, especially the seed production growers that are already experiencing the tremendous lift in Roundup Ready 2 Yield, you know, it's back to the old question I get all the time when I'm out with farmers, it's "When are you guys going to be able to do for soybeans what you've done for corn?"

And Roundup Ready 2 Yield's going to do that. It's absolutely going to be the best beans that a farmer's ever grown on his farm, and when they see that, they've demonstrated over and over, whether it's soybeans, corn or cotton, when they see those kind of yields, they move to that new technology. And I believe that's going to be ultimately the driver that's going to move them.

And we'll take all that into consideration as we do the valuation on value and do our pricing, but I believe it's that significant yield lift that will drive the farmers.

Robert Koort - Goldman Sachs

And if I might, one of your major retailers has talked about 50% increases at the retail level in Roundup. Now, I recognize you're not going to see that level of increase at wholesale, but why not strive to get a bigger share of that farmer dollar maybe extracted from your dealer network?

Terry Crews

If you think about how Roundup goes to market, we sell Roundup wholesale to distributors to retailers to, ultimately, to the farmer. And traditionally, if you look back a bit of a history, we've always just priced once a year on Roundup. And this past year we actually changed price twice in one year.

Globally, we change prices significantly more in other parts of the world where Roundup's been post-patent for a much longer period of time. And going forward, you know, we'll have that look again and that opportunity to do it.

But the channel provides a critical function and role in helping us distribute huge volumes of Roundup in very short order across the marketplace, so they're a critical component of how we go to market.

At the same time, we'll continue to look at the value that Roundup's creating and the challenging situation with supply around the world and making sure that our Roundup brands, which are premium priced in the marketplace, get reflected in that value.

And as we look at it, you know, if you go back a couple of years ago, our pricing band was $11 to $13 and now our pricing band we're talking about is $16 to $18, and we're talking about being on the high end of that pricing band.

So I think we've done a good job of getting at a significant part of that value that's available out there in the marketplace.

Scarlett Foster

We're going to take one more call, and then Hugh's going to wrap up with just a few comments, please.


Absolutely. Thank you. Your next question comes from Vincent Andrews - Morgan Stanley.

Vincent Andrews - Morgan Stanley

Thank you, everybody. Hugh, if I could just ask you, you threw out a preliminary expectation of triple-stack acres for next year of 34 to 35 million acres, and that's based on the 45 to 55 million acre footprint that you see.

And I guess I just have a couple of questions about that. The first is, is that 34 to 35 based on the low end or the high end of the 45 to 55? And then I guess, to follow up on that, is there a scenario in which the demand next year could potentially be larger than the 55 simply because more acreage could be planted year-over-year and because the price is higher, which might make the triple-stack more relevant on more acres from a cost-benefit analysis perspective?

Hugh Grant

On the first one, it's based, I would guess, on the midpoint of that range. You know, I'd kind of shoot for the middle of that.

And your second question, yes, I think there is the potential for increased utilization. You know, we stuck our neck out this morning and said, you know, we're guessing 90 million acres of corn next year, and a lot depends on how violently harvest is affected this year.

But, you know, the folks at Monsanto, we're going to see a lot of corn in the ground next year and depending on what happens to ending stocks is probably going to be an even bigger focus on yields next year than we've seen this year because with ending stocks being where they are the last couple of years, the country's kind of betting heavily on average yields. So when you start dropping below that, that's a big impact on close-out stocks, so shooting for the midpoint. And there's the possibility of upside depending on, you know, how much corn goes in the ground in the spring of '09, but it's the delicious thing about this business because, you know, we're seeing cold, wet weather. We're trying to work up, well, let's harvest this and we're already guessing what the harvest of 2009 can be.

Scarlett Foster

Vincent, if I could just add, I think it's not maybe as clear as we had hoped, but in giving you an estimate of 34 to 35 for the triple-stack, that reflects what we think will sell in our brand, ASI will sell in our regional brands, and our licensees will sell at the market share projections that we made.

If you run all of those numbers, what you'll see is we have given you a number that pretty much tops out our potential assuming, you know, no additional growth in acres or that we don't grow above our market share. So essentially what we're doing is we're tapping out our piece of the triple market just in time to convert it over to Smart Stax in 2010.

Hugh Grant

Yeah, that's a key. Really, next year becomes a platform for the Smart Stax launch, so we're going to chase this as hard as we can to facilitate the flip and the improved Smart Stax platform beginning in 10.

Vincent Andrews - Morgan Stanley

Thank you. Very helpful.

Hugh Grant

Thanks very much, Vincent. I think it's a good question to conclude on because it's really what underpins our business, which is that technology.

So we ran late this morning. I want to thank you for the extra time that you've spent with us. As the last question kind of teed up, today we spoke a lot about the intersection of innovation and leadership and I think, to Brett's point, I think that's the ultimate sweet spot in our business, and it's really showing through in our continued corn performance.

I mention this because of the importance of technology in our success. It sometimes has the potential to be lost as the speculation mounts on yields for the season and the planted acres for next year. Even if it's lost in the chatter, I want to assure you that we won't lose our focus and our absolute obsession with execution. Our innovation's brought us to the leadership position that we're enjoying today with farmers in this country and around the world, and it's the key to widening that competitive gap in the future.

So thanks very much for joining us this morning, and I look forward to speaking with you in the quarter. Thanks very much.


Thank you, sir. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation, and ask that you please disconnect. Thank you once again. Have a fabulous day.

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