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Monsanto Company (NYSE:MON)

Q2 2006 Earnings Conference Call

April 5th 2006, 9:00 AM

Executives:

Hugh Grant, Chairman and CEO

Terrell K. Crews, CFO

Carl M. Casale, Executive Vice President of North American Commercial Operation

Scarlett Lee Foster, Vice President of Investor Relations

Brian Hurley, Director, Investor Relations

Dennis Schemm, Director, Investor Relations

Analysts:

PJ Juvekar, Citigroup

Michael Judd, Greenwich Consultants,

Frank Mitsch, BB&T

Kevin Mccarthy, Banc of America Securities

Mark Gulley, Soleil Securities

William Young, Credit Suisse

Mary Connelly, Goldman Sachs

Don Carson, Merrill Lynch

David Silver, JP Morgan

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Monsanto Company’s Second Quarter 2006 Earnings Conference Call.

Operator Instructions

As a reminder this conference is being recorded Wednesday, April 05, 2006. It is now my pleasure to turn the conference call over to Scarlett Foster, Vice President of Investor Relations.

Scarlett Foster, Vice President of Investor Relations

Thank you. Thanks Natalie, and good morning everyone. I’d like to welcome you to Monsanto’s second quarter earnings conference call. And I’m joined this morning by Hugh Grant, Monsanto’s Chairman and CEO; Terry Crews, our CFO; and also by Carl Casale, who is our Executive Vice President of North American Commercial Operation. Also joining me are Brian Hurley and Dennis Schemm, who are my colleagues in Investor Relations.

You may recall that in our first quarter earnings call we reviewed the status of our R&D pipeline. Carl joins us this morning to review our US operations as the second quarter is defined for our US Commercial performance. Before we begin, I’d like to remind you that we are webcasting this call, and you can access this at Monsanto’s website at: www.monsanto.com. The replay is also available at that address. For those of you who’d like to go to our website, we’ve also posted slides there that accompany this call, and you’ll find them posted on the Investor Information page of the website. We’ll reference each of these slides by page number, which you will find on the bottom right-hand side of each slide.

We are providing you with EPS measures both on 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 in this morning’s presentation and in this morning’s 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 uncertainties, 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 contained in our most recent 10-Q and today’s press release.

I’d like to start by asking you to refer Slide four. As shown there, second quarter net sales improved 15% from the same period in 2005, reaching 2.2 billion. Second quarter gross profit improved by 22% from gross profit in the second quarter of the prior year. If you refer to Slide five, those two items effective reported net income and EPS in the relevant periods. On an ongoing business basis then, EPS for the second quarter of 2006 was $1.60 and in the same period last year ongoing EPS was $1.38.

Turning to the first half of 2006, net sales were 3.6 billion; a 21% increase compared with sales in the first half of last year. Gross profit in the first six months of 2006 increased 24% compared to the gross profit in the first half of 2005. If you’d again refer to Slide five, we’ve provided a list of the items effecting reported earnings in the relevant six-month period. On an ongoing business basis, we had EPS of $1.82 for the first half of 2006 versus $1.63 per share for the same period last year.

Gross profit for the quarter and the year includes the effect of the Seminis inventory step-up, which totaled 12 million in the quarter and 23 million in the half. We’d now expect the Seminis inventory step-up for this full year to be in the range of $50 million. The effective tax rate for the first half of the year was roughly 32%, compared with 17% in fiscal year 2005. The rate in 2005 was favorably affected by a Solutia-related charge and by the loss from the discontinued European wheat and barley business. Excluding these items, the prior year of rate would have been approximately 30%. We continue to expect that our effective tax rate for the full year will be in the range of 30 to 31%, and that rate is already factored into our full year guidance.

We had a use of free cash in the first six months of 2006 of 135 million compared with free cash flow of $500 million in the first half of fiscal year 2005. In the first half of 2005, we benefited from the timing of maturities of short-term investments, which created a source of cash of $300 million that we don’t have this year. In the first half, we had a greater use of investing cash for capital projects, which we had forecasted for you. We also had some one-time payments for the incentive payouts for Seminis and for the license agreements with the University of California for patents related to Posilac.

Overall, results in the second quarter and the first half were driven by a strong start to the US season in Seeds and Traits, and particularly in Corn. The acceleration in Seeds and Traits is being demonstrated with sales, gross profit and the EBIT line and reflects toward our confidence in our germplasm and continued adoption of our traits globally. The success of the variable pricing strategy in our US Corn traits and the value of stacking more than one trait, again particularly in corn also contributed to our success for this year. Additionally, our ASI seed companies have been in an excellent start for this US Corn season, and in the second quarter in particular.

Our sales results also benefited from the addition of our Seminis vegetable seed business, and to a much larger degree to our soybean and cotton business. On a pro forma basis, Seminis sales were down for the quarter, but flat for the full year. Although sales had been effected by a weaker than expected European market, we still expect Seminis to be modestly accretive to EPS this fiscal year.

Cotton seeds and traits are sold later the important soybean seed in the US, so we would expect soybean to be a more significant factor in the third quarter. All that said, organic growth accounted for roughly 95% of our growth in EPS year-to-date. All the addition of acquired businesses accounted for approximately 5%. Our strong start to the fiscal year is important, not only for meeting our commitments in 2006 but also setting the stage for meeting our mid-term growth objectives. We still expect full year EPS to reach the upper end of our original EPS guidance of $2.35 to $2.50. We’ve also reiterated today our free cash flow guidance in the range of 825 million to 900 million.

So with that quick snapshot on earnings, let me turn the call over to Hugh for a strategic review.

Hugh Grant, Chairman and CEO

Thanks very much Scarlett, and good morning to everybody joining us on the line today. As you know the end of the second quarter marks the practical start of the planting season in the US. Our auto dugs felled and trucks are now moving seeds to farms. The mid-March snowstorm in the Midwest brought some much needed moisture but its otherwise long forgotten though, and over the next six weeks days get longer, the ground gets warmer and tractors will roll over the ground and seed starts to be planted. On the other side of the equator combined or walking through the fields of Brazil, and about half of the harvest is in farmers’ bench and then on its way to grain elevators, and a few we are talking about your truck, the grain elevator are a cool off in Brazil, about half of the time you’d likely have run already soybeans and your load. So that’s halfway point in the global act production cycle, our first half results been – this has been a very good start for the 2006 fiscal year.

There are only two macroeconomic factors that have modestly dampened our enthusiasm. And even these we’re managing within our earnings projections. In fact when managing them even as we maintain our guidance as a upper end of our original estimate. So as we mentioned to you in our first quarter call when we set guidance for the year, we anticipated that we’d incur higher raw material costs for Roundup because of the effect of the 2005 hurricane season in the US, and this has been through throughout the first half of the year, and we continue to expect the effect to linger through the fiscal year as we consume the higher price raw materials. Additionally, the upward spiral of the Brazilian Real has affected not only our Brazilian customers, our in-country production and raw material costs. We are offsetting our manufacturing issues in part but not completely by our strong cost management capabilities. So as Terry discussed in detail in our first quarter call, the effect of the rising Real on our Brazilian operations has meant that Brazilian farmers who sell their grain in dollars have been squeezed when they purchase seeds and chemicals. That squeeze has been compounded by a lack of liquidity in the marketplace and in turn has an effect on our credit polices. We are taking steps to mitigate our risk in 4that environment by only selling for the most financially sound customers and forgoing higher risks sales and collateralizing our receivables with grain. As a result, our Brazilian sales are softer particularly in the Roundup side of the business, but this is a tradeoff that we’ve gladly made. I would say that both of these issues are modest in scale however compared with the success of our seeds and traits business globally.

I thought that it was important to highlight them for two reasons. Firstly, we made several assumptions about both manufacturing cost and Brazilian sales from the beginning of this fiscal year. And as a result we are fortunate to be managing both litigations rather than having them manage us. Secondly, these assumptions underscore our approach to guidance. When you view guidance as a commitment rather than an aspiration, you plan for the most probable case, not the best one. And I think that philosophy has been invaluable given these two macroeconomic dynamics.

So, now with the positive side of Brazil, the value of Roundup Ready soybeans continues to spread even in the pace of our a rising Real. Well, this year’s harvest is only about half way done, we still expect that new seed sales are in the range of 4.5 million acres and the safe seed is in the range of 20 million acres. We expect that revenue will be recognized by modeling over the course of the third and fourth quarter, and will vary depending on when the grain was commercialized by the growth. Our grain-based collection system for safe seeds, which was a mere hope as we started the 2004 season in Brazil. Today it’s running smoothly across the entire country with over 95% of the grain origination enrolled.

So, hence it is great news for the global expansion of our soybean business that have the potential to add an incremental 25 million plus acres of Roundup Ready trait revenue to our growth by the end of the decade. So while the potential for growth of Roundup Ready soybeans in Brazil is promising, the story in Argentina is regretfully more of the same. Despite two long years of trying to negotiate a reasonable agreement for being paid for our technology, the ban for them continues.

We understand that in response to our planting enforcement actions recently in Europe, the Argentina competition authority is considering whether or not to file a formal federal proceeding against us. Our object is isn’t to escalate this retract or object just to reach a reasonable business solution for farmers benefit and we are fairly compensative. And in that such time, our estimates for future earnings from Roundup Ready beans in Argentina will not be in our guidance.

With the pivoting results now ramping up with the harvest, lets move north where a blockbuster year shaping up for seeds and traits in the US. In January, we said we expected to grow our corn seed market share by 1 to 2 points in our branded DEKALB and Asgrow seeds. Today based on our Argo group shipping patents, we clearly see the strength of our breeding programs being applied at the commercial level. We will have market share gains in our branded seed of two share points but this is more than a single data point in time. 2006 will mark our fifth consecutive year of 1 to 2 market shares gains annually.

Everything that we’ve achieved through 2005 has come from our ability to mail international germplasm and to make more effect that’s on more predictable corn seeds of two demo seeds. Yet today, we are entering into a new phase for the significant investments that we have made in molecular breeding has the potential to drive additional market share gains. Molecular breeding combines the power of fantastic germplasm libraries with genetic maps and precision screening that allows the breeder to make the absolute best choices before the seed ever touches the ground.

So its not to say that molecular breeding hasn’t played an important role on the gains we’ve made in the last five year, five years, in fact the gains we’ve made have resulted from the interplay between our global germplasm and our ability to make better breeding choices through tools like genomics and markers. If you turn to slide 6, you will see that you made our recent market shares gains with only partial applications of our molecular breeding capabilities. When we made the decision to invest in molecular breeding applications in the early fabulous decade, we did so with the belief that breeding technology could be transformational in this industry. Today with more than 200 breeders working in more than a 100 breeding research centers what would lay, I think we have only seen the tip of the iceberg when it comes to improved genetics for farmers and the subsequent market share opportunities that lie ahead of us.

2006 is really the first year that has combined all the tools, and all of the potentials, molecular breeding and finished hybrids in the commercial portfolio. The share gains that we have made today reflect the incremental steps we have made in breeding technology. And they will only be accentuated with the full power of our molecular breeding technology behind them. And totally that translates dynamically to our competitive position in the marketplace. In the past I think the caliber has been shown but known as the technology seed reflecting that we’ve aggressively penetrate that the DEKALB brand with biotech traits.

However, the count for yield has always been recognized in other brands. I believe that this is changing because of our breeding storage, but the show of strengthen of germplasm doesn’t end with the national brands. Our breeding engines are chumming out enough high-quality germplasm to support free channels including ASI and our licensees. We’re now infusing technology in genetics and through the same channels that serves more than 260 seed companies across all of the cotton growing region in the US.

If we have taken a new standard for the quality for the seed in US market then the triple-stack biotech traits are setting new standard for technology use in corn. This is significant from a competitive position and from a financial perspective. Competitively speaking every new value added trait in cotton, things like high germplasm must be built on a platform of stack, weeds and insect control. So the triple-stack is faster becoming the farmer seed of choice in the cotton market. Financially speaking for Monsanto, we did the leading edge of that curve and the profitability for acres that are refinanced.

End of the joy, and collectively these are great indicators for the success of our seeds and traits business, and by expansion our overall performance for this fiscal year. However, the race this year is only half over, and we considerable look ahead of us to make sure that we finish strong. The good news is and I think this really is good news, with performance strongly enough to compensate for a currency effect from Brazil, and for higher raw material and manufacturing costs and yet remained confident that we will deliver approximately 20% ongoing EPS growth over last year.

Our results in the second quarter can stand alone, reflecting strong performance and encouraging momentum, but put into the context of our seeds and traits evolution, our performance is even more encouraging. I feel very good about our prospects, not just for this year but for the long-term because we’ve more than single data points, lean out of trends, and Terrell will tell you all of this is easy to say, but its very hard to do, fortunately he has got the data to prove that it can be done. So with that, let me welcome Carl to the call and ask him to give you some final metrics on what’s driving the success for seeds and traits in the US this year.

Carl Casale, Executive Vice President, North American Commercial Operation

Thank you Hugh, and good morning to everyone on the line. As Hugh indicated success in our second quarter is a critical barometer financially for how our seeds and traits results went forward for the year. More importantly, going into the planting season in US this is the first chance anyone gets the past six months towards the marketplace aspirations with actual field data. The barometer check I would like to do today then is one of checking our forecast with the facts.

I skipped the better part of the last six weeks with many of the players who will determine how the US market shapes up in 2006, including our license partners and our largest farmer customers, what I will share with you today is the data that my team has collected from the frontline. These are the data points that I look to as signals of strategic success or setback, and it will support our ultimate financial performance this year and into the future.

I’ll start where the farmer thinking starts, and that’s with the seed itself. Few indicated that the check of our free cotton seed channels indicates for on track for further growth in US market this year. Let me now give you the specifics. The metric we are most familiar with is the market share performance of our branded DEKALB and Asgrow seeds. At our November 10 Investor Day, we told you that we believe we could reasonably achieve, I wanted two point share gain in our branded seed business again this year. As you’ve noted based on our second quarter reading, we are confident that our Asgrow and DEKALB corn seed brands will be in two market share points this year.

If you look at Slide 7, you will see that we have recently completed some research on purchasing trends in the market with approximately 1900 farmers from the Midwest. Our research indicates that of those farmers who purchased seed from the other major players in the US corn industry, roughly 36% received some level of free seed this year. But historically few companies do use seed offers as purchase incentives, if not the free seed the market this year definitely surpass this conventional incentive programs. For Monsanto, we typically use free seed to indent things like side-by-side field travels.

Our policy on free seed remained unchanged this year and the number of bags used is immaterial to our share growth. Even in that stabilizing environment, our branded seed is growing at the top end of our expectations. Its more economical to the farmer to turn down free seed then to sacrifice the yield performance you can get by paying for the right combination of seeding technology.

A free bag of seed might have been something upfront, but by the time you factor in weed control cost, insect control cost and decrease yield, its economically irrational to pass up great seeds for free seeds. Our November projection focused on the growth in our national brands, so we didn’t put any quantitative targets on the opportunity for our newest channel ASI. If you turn to Slide 8, you will now see the projected market share performance for all three of our channels.

The frontline data we have is beginning to tell a powerful story in ASI that even we do not fully appreciate. At the end of fiscal year 2005, our ASI companies represented about 3.5 market share points. This is the model that’s growing, well through both on acquisitions like the once we made in March, and two the core performance of the ASI brand.

During fiscal year 2006, we have acquired possibly another 1.5 market share points. In the last year we have been able to organically grow the market share position of our original corn seed ASI companies by about a half a market share point. That means that by the end of fiscal year 2006, ASI’s market share will stand at approximately 5.5 market share points.

Because of where we are in the license reporting cycle, we won’t see our first real look at the market share performance of our holdings of corn states licenses until later in the year. But anecdotally we believe we are benefiting from the powerful combination of our germplasm and technology, uniquely positioned to service to farmers’ choice.

From seed we move to technology. As you indicated we put ourselves in a position to explore the growth in our corn trait business this year, especially for stacks. This trait expansion is driven by the benefits farmer see with the technology applications. This year through our variable base pricing model, we’ve created a mechanism to allow farmers to see how well the technology can work in regions where it may not have been intuitive for them to do so.

In variable base pricing, we adjust for the differential needs for insect protection across the US. For instance if your farm is in Mississippi and haven’t had a historical problem with corn-borer pressure, variable base pricing allows you to get the value of the trade in the insurance level, rather than a premium level.

If you turn to Slide 9, this is the first comprehensive update for the 2006 outlook for variable base pricing. This slide breaks out the comparable effect of variable base pricing on our DEKALB and Asgrow brands last year, for this year. Basically two important things, first variable base pricing is driving an increase in the absolute number of trade acres especially in areas where insect pressure is not consistent. This means that a higher percentage of US corn acreage will have at least one trait this year.

Second, on each of those acres, there is a higher percentage of stack traits, with a disproportionately higher growth in triple-stacks versus double stacks. If you now move to Slide 10, now that we have the preplanning look at the effective variable base pricing and we have all the secondary seed production back from one of our nurseries in South America, we can say with confidence that we are on track for 34 million trait acres of Roundup Ready, that puts us in a strong position to reach a target market of roughly 50 million acres of Roundup Ready corn in 2008.

Our variable-based pricing strategy has created additional pull for our YieldGard family of insect control as well. YeildGard Rootworm, which we targeted for 10 million acres just recently in the first quarter, we now believe maybe even slightly stronger. And our YeildGard corn-borer acres are expected to be at some 3 million acres over the last year to approximately 34 million acres, even with the increased competition from the Herculex corn-borer products.

It’s also important to remember as the total corn-borer market expands we also get a royalty from every bag of Herculex sold. Finally, the growth of those three traits individually also reflects the strong demand for a triple-stack. We believe we will see a threefold increase in our triple-stack acres since its introduction two years ago, reaching more than 5 million acres this year. That demand effectively means that we’ve sold out triple-stacks. Reflecting the shift towards more traits and more stack-trait, the trait penetration mix in our brands and among licensees is getting richer every year.

If you move to Slide 11, you will see the shifts in traits penetration across the three channels. In 2005, 87% of the DEKALB and Asgrow bags we sold contained at least one trait, and of that 50% contain a stack-trait. In 2006, more than 90% of our corn portfolio contains at least one trait and 59% of those were stacks. With the increase in stack penetration signaling the magnification of stack to variable-base pricing. Likewise our likely these channel has a similar story of continued trait penetration and most notably stack-trait penetration.

In 2005, trait penetration among licensees stood at 44%. This year that number now stands at 60%. But what is more significant in the overall trait penetration growth is the increase in stack penetration. From 2005 to 2006, percent of stack-traits for licensees jumped 16 percentage points. Today, the licensee bag contain a trait, 43% of time there is a stack-trait. That means that close to one out of every two bags sold with the trait for our licensees is now a multiple trait bag.

The same trend apply for ASI companies. The overall trait penetration and stack penetration have increased year-over-year. Ultimately this year’s results will set the stage for next year, we’ll achieve a watershed event in season traits history. In 2007, its highly probable that the total number of corn acres with any combination of stack-trait, will surpass the number of single trade acres and within our own DEKALB and Asgrow brands, we can take that one step further. By 2007 we would expect the number of triple-stack acres in our national corn brands will surpass the number of single trait acres.

So if you look out for the next few years, the dynamic and the market shift. The shift is in favor of companies that make leads and decisions quickly, appreciate the pace of change in the industry, and mould their business to the ever-changing farm landscape. In this dynamic environment, you basically have two options, you can focus on the tactical battles squeezing your business year-in year-out to either fend off competitive movement and jockey for some sort of annual price, as short sighted as this seems, this is how a lot of business in competitive markets gets done, would be often misplaced so the annual tactical battles build into long-term competitive positions.

The other option is to take a strategic look and work backward from the position you want to be at some point in the future. We are constantly mapping the evolution of this industry and the actions we are taking today of positioning moves not only for this year but also to establish a trajectory to the end of the decade. There is going to be lot of talk about who will do what by the end of the decade.

The reality is that that half way is all that relates strategically brick by brick with actual performance today. I believe our advantage is that we feel we are going to do and then we do it, whatever is aspired to do we execute year-in and year-out. The growth in this industry is known by a long shot but the data we are seeing rolling from the frontline has proved that Monsanto’s strategy and thus our ability to earn a disproportionate share that going by, is that by real intangible performance. With that, let me turn the time over to Terry, thanks again.

Terrell Crews, Chief Financial Officer, Vice President

Thank you Carl, and good morning to everyone. As you heard this morning the strength that we’ve seen in our seed and trait business and corn seed market share gains to increased trait penetration is translating into higher sales, improved gross profit, improved EBIT and higher EPS for both the quarter and year-to-date. For the quarter and for the first half we’ve established record sales of 15% and 21% respectively over the prior periods.

The related EPS growth is coming from our core businesses as 95% of our EPS growth year-to-date is a result of organic growth. Free cash flow is less than it would have been at this time last year but we remain on track to meet our full year guidance regarding free cash. As we look forward you can see on Slide 12 that we continue to expect our earnings will be at the upper end of our original guidance at $2.35 to $2.50 EPS for the fiscal year 2006.

This guidance reflects all the good news that herein Carl addressed as well as the smaller negatives in Brazil and manufacturing cost that Hugh discussed. In our fourth quarter earnings call, we said that we thought higher raw material cost would have a slight negative effect on EPS. With the addition of the strengthening Real in Brazil, we now think that parity in raw material cost will collectively affect this year’s EPS in the range of $0.10 per share. As we look forward, the third quarter would be our second largest quarter from an earnings perspective for the year, and our fourth quarter as has been historically would be a loss although somewhat less than the loss we occurred in 2005. While it would be easy to become highly optimistic about our business given our strong first half results, because of agriculture and that we have another three to four months of uncertainty around the timing of sales, the weather, and the actual acreage of seeds and traits planted.

And that uncertainty extends beyond our own branded sales, the sale of seeds and traits for our licensees. Although they fulfill very little seed whether it’s in a branded or licensees bag is going to the ground in the US. And we have competitors who are aggressively giving away seed returning at the closer monitored seed returns.

Additionally, until the seed is in the ground, and not for the weather. Recent range of snow in the Midwest have added much needed moisture, the parts of the western cotton growing regions are still dry. If that dryness dwells into dry, we suspect some farmers in the western cotton growing regions in that trait are second generation stack-traits, in favor of lower seed cost.

We have a much better angle in all of these factors as the season unfolds. All of that said, we see to give guidance as a commitment and even given our experience with the uncertainties of agriculture, we are pleased six months into the year, and we’ll continue to commit the guidance of the upper end of our original range.

And by our third quarter earnings release, we will have a better picture of the season ground, and do another check of our performance and our full year expectations. While free cash flow through the first half is significantly lower than at this point last year, we are equally confident that we can meet our guidance of 825 million to $900 million for this fiscal year. This is truly to know we are covering some items that were not a part of our original thinking when we sell our guidance last call.

Most notably our free cash guidance is not covering the February license agreement with the University of California regarding Posilac related patents. From the cash flow perspective, the upfront payment of $100 million was included in cash for investing activities in this quarter. Additionally, our guidance also covers the $125 million performance earnout related to the Seminis acquisition.

This payment was made in the second quarter and likewise was reflected in investing cash. The use of cash for accounts payable and accrued liabilities increased year-over-year primarily because of timing of tax payments in accruals. In addition when comparing year-to-date free cash flow receivables or use of cash commensurate with higher seeds and trait sales. We continue to look to optimize to further improve our working capital and receivables were 29% of the sales for the first half compared with 32% of sales at this time last year.

That said, we’ve largely known the most significant of our working capital opportunities over the past two years. In investing cash the first half of last year included a $300 million short-term investment then matured in the second quarter. We don’t have that half of investment benefiting our investing cash during the first half of this year. However, we do have a short-term investment of $171 million, of which $150 million were material in the third quarter, and that will help us offset the effect of some one-time items we have incurred in the first half.

Going forward, our free cash flow guidance continues to assume capital spending for the full year in the range of $350 million although the timing will vary among the quarters. Our guidance does not reflect or include the potential effect of Monsanto underwriting all or part of the proposed $250 million rights offering associated with our participation in Solutia’s bankruptcy and organization plan.

Likewise our guidance makes no assumption about meeting equity stake that we might get in Solutia once it is emerged from bankruptcy. Court approval is still pending for Solutia’s re-organization plan. Like many other US companies Monsanto is actively working on how we believe we can best use the cash for repatriation opportunity created by the American Jobs Creation Act of 2004. Fundamentally this is a one-time provision that allows company like ours to reinvest foreign profits back into the US at a discounted tax rate. By stature the maximum amount that we could repatriate is $500 million, which when fully utilize we create a tax liability of up to $25 million. And we have not yet finalized our repatriation plan so no liability has been reflected in our financial statements. Any participation in the plan must be completed by the end of our fiscal year, and I will be able to provide greater clarity at the final effect at that point. One important use of free cash continues to be share repurchases, then we hopefully we ended to put our repurchase plan in place at our last quarter’s earnings and in the last two months we purchased $57 million in stock.

Overall we’ve been in mediocre position of having new larghetto in up three months into the fiscal year because of our early strong indicators for the growth of our seeds and traits business. Today, even with the major US planting seed is still of a sorrow, we remain comfortable with commitment, their EPS guidance will be at the top of our original range, the range that represents approximately 20% year-on-year growth. At this point, let me turn the call back over to Scarlett for questions.

Scarlett Lee Foster, Vice President of Investor Relations

We’d like to go ahead and open your call to questions, and I’d 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 are always welcome to rejoin the queue for a follow-up question. Operator, if you would go ahead please.

Question-and-Answer Session

Operator

Thank you.

Operator Instructions

Our first question comes from the line of PJ Juvekar from Citigroup. Please proceed.

Q – PJ Juvehar

Good morning.

A – Hugh Grant

Good morning PJ.

Q – PJ Juvehar

Question for Carl. Carl, reportedly Pioneer was offering “buy one bag get one free” deal, and you still gained share, so congratulations. And you did not raise pricing on any of your major traits this year. Was that strategy related to new competition entering the market?

A – Carl Casale

We look at price, PJ, every year just relative to the overall marketplace and farmer demand. Please bear in mind that a core of our price strategy this year was the implementation of our variable based pricing strategy to drive penetration of doubles and triples across the Cornville, so our strategy is driven by growth, not by competitive response.

Q – PJ Juvehar

And then in triple-stack, on what portion of your acreage did you discount the triple-stack?

A – Hugh Grant

The portion of the acreage on which the triple-stack would be...?

Q – PJ Juvehar

Discounted, yes, and the variable prices?

A – Hugh Grant

Yeah the way that we describe that is that if you think about the base price on it, you could see a discount in the east of perhaps upto 50% off of the mean price, but on a volume standpoint it is blended, we don’t break it out any further than that PJ.

Q – PJ Juvehar

Okay, and one quick housekeeping question for Terry. Terry, you talked about working capital drag on free cash flow, how much of that drag was because of Latin America and the problems there? Thank you.

A - Terrell Crews

Actually, very low relative to Latin America, we have actually seen improvement in our receivable position in Argentina; Brazil, we continue to watch but April and May are major collection months for us in Brazil, so we will be monitoring that closely. Rather what we saw from working capital was a combination of, the fact that we didn’t have the advantages we had last year in working capital reduction, which was our intent in business. And secondly it was really just a growth of our US seed and trait business so are really more driven by growth and I think that’s evident because our receivables as a percent of sales continue to come down, and just not at the same level that we saw in the previous year.

Operator

Thank you. Our next question comes from the line of Michael Judd from Greenwich Consultants, please proceed, your line is now open.

Q - Michael Judd

Good morning, and congratulations on a good quarter.

A – Hugh Grant

Thank you.

Q - Michael Judd

My question is weather related, you know we had a relatively warm January, could you talk about how the weather in January and February might have impacted sales of corn in the Midwest and what current weather conditions both for your fiscal third quarter please?

A – Terrell Crews

Yes, Mike good morning to you, so that the joys of agriculture is, no seed is planted yet, so we start selling seeds around Thanksgiving, and until the seeds in the ground you know that’s never done as done, so we’d – a mild stop to the yield. The good news is, this has been reported in the last week that much of the soil moisture deficits is in the Midwest have largely been made up. When we go into the spring planting season now where its a much better soil moisture profile when we did in the January-February timeframe, so my crystal ball says the swings have been reported between corn and soybeans, that last ton of the corn is going to be largely dependent on cottons and weather in the April-May timeframe. The good news is seed beds are looking better from the weather in January.

Q - Michael Judd

Thank you.

Operator

Thank you, our next question comes from the line of Frank Mitsch of BB&T, please proceed, your line is now open.

Q - Frank Mitsch

Thank you, good morning and what a great quarter, congratulations to you.

A – Hugh Grant

Thanks Frank.

Q - Frank Mitsch

My question is regarding comments that Depp and Klein made yesterday in terms of those seeing business in the cotton seed area shifting from the second quarter into the third quarter, that fiscal second quarter into the fiscal third quarter, because distributors are falling off on orders due to various price increases, can you comment on what you see in that marketplace and what might that bring for your third quarter?

A – Hugh Grant

Yeah, I maybe let Terrell comment on that, he’s closer to the cotton business right now.

A - Terrell Crews

Frank, its Terry, so just from a timing of that business, we will see more of that effect to occur in the third quarter, I don’t think that’s a necessary unique event this year. The only real thing that for us to watch yet in that business is, the USDA forecast on acreages is higher, its 14.5 million, don’t know that it’ll be that high, anyway real variable we are watching its just moisture conditions in the western Cottonville, whether or not there will be adequate for a sustained planning.

Q - Frank Mitsch

You would have to maintain one unusual this fiscal year in terms of this here in 2Q and the 3Q, then you would have seen in other years?

A – Hugh Grant

No. We understand that our business that was largely a loss in the wheat business so we typically see our business in the third quarter in cotton.

Q - Frank Mitsch

Okay fantastic, and you made comments with respect to triple-stack acres in ’07 going, do you have a rough ballpark in terms of the amount of acres that you would expect?

A – Terrell Crews

Its too early Frank, I think I would ask you – this spring planted before we speculate on May 2007.

Q - Frank Mitsch

Okay, fantastic, thank you.

A – Terrell Crews

Thank you.

Operator

Thank you. Our next question comes from the line of Kevin Mccarthy of Banc of America Securities, please proceed.

Q - Kevin Mccarthy

Yes good morning. My question relates to corn seed market share. If I look at Slide 6, your share has grown from 10% to 16%, we add on another two in share gains in ’06 plus another 5.5 for ASI, it seems like you control about 23.5% of the market today in terms your holding on businesses, meanwhile your competitor has lost perhaps 10% or so over the last 5 years, it sounds like you believe these trends are sustainable and if that’s the case you think you can become No.1 in US corn by the end of the decade?

A – Hugh Grant

Kevin, thanks for the question, I think your math is accurate in terms of that for the 23 share points, you know as I said in my comments the way that we’ve approached this is one step a time, and the farmer as has been proven this year, the farmer buys good stuff, and if you continue to produce good stuff then the farmer will pay for the and the corollary applies as well so, I don’t speculate where we are going to be at the end of the decade, I am really encouraged by what we are seeing coming through in our genetic gains and what we are seeing coming through in our molecular breeding programs and we’ve really, really have almost seen the front end of that. So, rather than saying where we are going to be at the end of the decade I’d say the best is yet to come in terms of performance and the translation of our breeding programs into the field. And if we continue to do that, then we will continue to see these kind of share gains I think.

Q - Kevin Mccarthy

Okay, and then a couple of more narrow follow-ups on corn. Carl, you mentioned that you still get a royalty from Herculex, what is the magnitude of that royalty relative to that received from your YieldGard licensees, is it half, is it a quarter, can you help us out with that?

A – Carl Casale

Kevin, we don’t disclose approximately what that royalty rate is.

Q - Kevin Mccarthy

Okay, and then finally, I think it was earlier this week, I saw a press report regarding Syngenta’s unapproved Bt10 product and it sounded like the authorities were not completely satisfied with the test that was developed, do you see this as a material issue as it relates to exportability of US corn for ’06?

A – Carl Casale

Kevin, I don’t know, I think the key in this, if I am going to comment on some dioxides then on testing protocols, I mean the key in this is as you develop and got these products approved, you need some global approvals because these are products that move in nationally, and as we look at our pipeline, we look at what we have done in the last 10 years, that’s been a matter of principle of Monsanto, also if we got an approvals in the US, we’ll also strive to get global approvals then show the free movement of good so, I think that’s what market leaders are doing there and the gain going forward as well.

Q - Kevin Mccarthy

Thanks very much.

A – Carl Casale

Great, thanks for your questions.

Operator

Thank you. Our next question comes from the line of Mark Gulley from Soleil Securities, please proceed.

Q - Mark Gulley

Carl, I thought one of the most intriguing statements you made during your presentation was the fact that by ’07 triple-stack corn acreage could approximate that of single-stack corn acreage currently, and my model suggests that that number is on the order of 15 million acres thereabout perhaps more. So, I’m trying to connect these dots here, are you indicating that perhaps you can be in the 15 million acre on triple-stack by that time?

A – Carl Casale

We wouldn’t be - our numbers wouldn’t be that strong.

Q - Mark Gulley

Wouldn’t be that strong for single-stack.

A – Carl Casale

No, no, for 15 million acres of triple-stack next year.

Q - Mark Gulley

Okay, well maybe you can clarify the statement you made then, you made a statement during your prepared remarks about the potential for triple-stack in the ’07 timeframe, perhaps you can clarify that, perhaps I didn’t get that right?

A – Carl Casale

We talked about it in our own brand, its the rate at which we are penetrating, the DEKALB and Asgrow that in our own brand.

Q - Mark Gulley

There we go, okay

A – Carl Casale

Okay, that’s it.

Q - Mark Gulley

Okay, thanks for your clarification.

A – Carl Casale

Okay, no problem.

Operator

Thank you. Our next question comes from the line of William Young from Credit Suisse, please proceed, your line is now open.

Q - William Young

Hi, good morning, I was wondering if you had any advance indications on Roundup Ready Flex in cotton realizing that third quarter is going to be a much more important for on the cotton seed in your sales as far as all the licensees in all? Yeah, so – your last statement is pretty much the answer that the third quarter we are going for a snapshot in that and maybe see, Carl’s any color in terms of how it is going so far?

A – Carl Casale

I mean, we said previously that we had an expectation of 2 million to 3 million acres, and you know we still feel confident with that range Bill but until we see what actually happens and what gets planted, we won’t be in a position to tight it down anymore yet.

Q - William Young

And what’s going to be available 2, 3 million acres, that’s available or would be different from that?

A – Terrell Crews

No, it’s in the, we have availability to supply between 2 to 3 million acres of plantings.

Q - William Young

Okay, okay great, and one more quick one, the Roundup sales were down at, I think you mentioned Europe, Africa, and Asia Pacific, can you give us some idea whether its volume or mix or price or how those three things will play into your decline in Roundup sales year-to-year?

A – Terrell Crews

What we’ve seen Bill so far as this is largely volume driven, we’ve had a little bit of softness in for us in Asia Pacific. Just as a reminder we had a policy to uptake in Europe in the first quarter, which we were expecting some downslide in Europe in the second quarter, but overall year-to-date down modestly in Europe and down a little bit in Asia largely volume related.

Q – William Young

Okay great, thanks Terry.

A – Terrell Crews

Thank you, William.

Operator

Thank you. Our next question comes from the line of Mary Connelly from Goldman Sachs, please proceed, your line is now open.

Q - Mary Connelly

Thank you, I am just wanted to follow-up a little bit on Seminis, talking about how the second quarter was a little bit weaker than last year, the first half its flat. Can you just, I guess more broadly speaking talk about, how its performing, how its expectation, I know its so expected to be modestly accretive in ‘06, but sort of give us some details on how that business is performing versus what you had expected?

A – Hugh Grant

Thanks for the question, so I think if you look at first half – full first half then inline with expectations and certainly inline with our modeling at the time of the acquisition so continue to be happy with the business, well but softness in the second quarter and that’s primarily the European markets and softness in European and the European vegetable business overall, but if you do the first half look, we are happy and then just general expectations we’ve made some significant management changes in Seminis so Kerry Preete who run North American operations is out there running the business now, Marilyn Edwards, one of our soft cotton breeders is now running our technology programs; and Andy Kuchan, a number of you remember, from his days in Investor Relations and more recently an CFO for our Asian businesses is out there running the numbers. We have very strong team at the front end of that business and the more time I spend with the Seminis people we are more impressed on with the quality of the people there. So, what we are doing at the moment is operationalizing the business, merging some of the backroom operations in Monsanto and really focus on the technology leverage particularly in breeding, and a lot of what I’ve talked about this morning in cotton with molecular mass codes and the gains we are making there. My expectations is will be done in the same segment in the next 3 to 5 years in vegetables, and Terry, you got to add in that note.

A – Terrell Crews

The only add I would have is that when we take a look at the gross margin in Seminis and we add back the inventory step-up and the margin – gross margin in Seminis is running in the mid 60s percent of sales, which is exactly what we’ve talked about a year ago when we made the acquisition, so from a revenue standpoint about where we expected, even with some softness in Europe, but from a margin standpoint we are right on point that’s where we thought we would be.

Q - Mary Connelly

Okay, in terms of modeling and what kind of a reasonable growth rate for the next say two to three years?

A – Terrell Crews

Well, we haven’t discussed a growth rate relative to Seminis from a revenue standpoint, we’ve said that in 2007 we think Seminis can contribute somewhere in the $0.20 range from an EPS standpoint, I am still confident that that’s deliverable by our seasons rate thing by our vegetable seed thing.

Q - Mary Connelly

Okay, thank you very much.

A – Hugh Grant

Thank you.

Operator

Thank you. Our next question comes from the lines of Don Carson from Merrill Lynch, please proceed.

Q - Don Carson

Yes, thank you. Question on seed dynamics, I noticed that the gross profit for soybean was only up about 4 million year-over-year with a 4 million acre in projected increase in soybean planting this year, I would have expected higher year-over-year profit increase. Does this reflect that our third-year plan is out there discounting the around a pretty trade fee in soybean to be by corn for them so it just reflected tough price environment there? Can you talk about market share trends in soybeans? And the broader question would be, are you at the point now where corn is more important to you in the US from acreage standpoint and overall profitably standpoint that is to say if there is a production in corn acreage, does that hurt you more than the gains you make in soybean?

A – Hugh Grant

Don, thanks for the question, I think what you’ve seen in this is the law of large numbers in terms of penetration in beans but when I see in that level – I’ll maybe let Carl talk about share gains and discounts, and then Terry talk about absolute margins.

A – Carl Casale

Sure, first of all from a competitive dynamic standpoint, Don, we don’t see the market being any more competitive this year than it was last year or the year before, I mean it is always a highly competitive market. Within that market we feel good about what our position is going to be overall this year. The last point that I would make is we talked about this at our November Investor Day when there’s even talk back then about a shift from beans to corn. Based on our current business mix, there is about $0.30 an acre premium on corn relative to beans for us, so if an acre shifts from corn to beans the cost is $0.30. So model out whatever you think the biggest swing could be this year and its not going to be materially to our overall business, it would be fine. The other thing is, I am just still not ready to believe the USDA numbers, this swing is going to be as big as they are calling. But that said, even if it does we are pretty well insulated, and both corps are very, very important to us.

A – Terrell Crews

I’d just add Don, relative to margin standpoint on soybeans, we see a very similar margin, actually a slighter tick in margin on a year-to-year basis, so I don’t see that pressure as it relates to margin on the processing side. I think the key for us in soybean that the USDA acreage sows and really that kind of growth, its probably reflected in lower returns as soybeans as opposed to what we would see in terms of shipping at this point, that’s the way the crop and I think we will have better reflection of that, where the acreage goes in the third quarter when we get through with it, next season.

Q - Don Carson

Whereas I assume like corn return, has it given the demand for your traits that even corn is inline with the USDA number that you are not going to see much of a difference in returns than at corn?

A – Terrell Crews

Well we watch that but we are usually pretty good about our projections for corn returns, its something we hit regularly without much issues. So we are accruing at about the same level we have been in the past and that’s what I would expect in the case of corn soybean, that’s where you could see some shift of a percent or two displaced on it being at a later season planting.

Q - Don Carson

Thank you.

A – Hugh Grant

You know Don I think if your question have been 2 or 3 years ago then we’d much more sense to beans and corn. Thanks for the question, it does in 2 to 3 years from now to develop more sense that the cotton and beans but we are ready for that inflexion point, at the moment where we are fortunate that the crops are pretty much neutral between this.

Q - Don Carson

Okay, thanks.

A – Hugh Grant

Thanks a lot.

Operator

Scarlett Foster, Vice President of Investor Relations

Natalie, this is Scarlett Foster, would you take one more question please and then queue is going to do a wrap-up, please.

Operator

Okay, so our next question comes from the line of David Silver with JP Morgan, please proceed.

Q – David Silver

Okay, thanks a lot. I guess I only like to maybe just follow-up on the last question first, and then question a about Brazil. But, the perspective plantings numbers came out and they showed a big drop in corn acreage for the US and potentially a large increase in soy acres. And I am wondering broadly how Monsanto had used those numbers, have you done your own internal surveys, and could you give us some guidance as to what your best guess on corn acreage and soybean acreage would be, and how Monsanto is positioned for that?

A – Hugh Grant

Let me just take a brief run at it David, I think this is one where past performance might be an indication to future performance because every year those speculation on how big these swings are and generally over the last 4 or 5 years, what ends up being planted is somewhat deferred from the speculation, I will say there is more call elenchus printed then there is actual acreage swings, so there is a lot a talk about this, which in the end becomes for our business largely immaterial. So I think that the last piece of the swing will be dictated more by what does weather look like and how late does the plant will grow than the macroeconomics of corn investor selling. So that would be our view, and as I said to Don’s question where we are in the evolution of our business, this year we are pretty much differ economically between the two corps. Going forward the cotton would be more a percent of - as we see doubles and triple-stacks, a lot of penetration grown in corn but we are kind of have a sweet spot between the two crops right now.

Q – David Silver

Okay thanks, and then on Brazil I was wondering if you could just provide some big picture thoughts about the potential contribution from I guess the soy efforts in Brazil so in the past you have talked about kind of a small accretive effect of your Brazilian programs on EPS this year? And then in the call in your earlier comments, I guess you said some acreage targets out there for kind of the end of the decade from Brazil. So, if you could maybe update us or give us your best thoughts on what you think the deals and its earnings affect the various programs you have underway in soy in Brazil, what kind of affect they might have, say this year and then if you look out for 20 ton?

A – Hugh Grant

Yeah, some of you just say a few words I’ll let Terry – let Terry come back on us. So here is the good news. The good news is for many of you and the dark past of 2004 we said that we were going to stop program on how we could share value and capture some of our technology volume in Brazil, and the good news is as we see harvest kind of halfway down this year, we have got about 95% at Holden’s for that program, are more now looking at two opportunities, either capturing value and the harvest that’s ton of grain or capturing value and a soybean bag of seeds, a soybean bag of seeds, and its going pretty well. As you know Brazil, you take one year at a time, but it’s going pretty well so far. And what I said in my prepared comments was we saw the opportunity for about 25 million new acres thereby the turn of the decade, but Brazil as a business that you take one year at a time some. I am delighted with what we’ve done so far, but we’re going to have to take this one season at a time but we are off to a really good start. And I am going to let Terry add a few words in terms of the opportunity.

A – Terrell Crews

What we said for this year, and I still think is true is going to be somewhere in the $0.05 to $0.10 range for a profitability associated – of EPS associated with the Brazil, value capture system and our fresh seed that was sold into the marketplace, and that this year would represent somewhere in the neighborhood of 20 to 25 million acres, probably closer to 25 million acres, and so we think there’s another 25 million acres. The difference in the $0.05 to $0.10 largely depends on when we will be able to recognize our revenue in there, and basically when the soybean gets delivered so, the soybean is delivered, our assumption on the range there it is somewhere that it could be delivered into next year as well under our next fiscal year. Relative to where we think it could be at the end of the decade, I still believe that as you say we have the short of 50 million acres of soybeans in Brazil. Well we haven’t discussed and I’ll think its prudent to discuss at this point and where we are at is, with the processing on that it could be to get to an ultimate value capture for us as a business. Right now its making sure that we continue to drive penetration, we continue to move towards fresh seed and organize a two different value capture systems that we have on fresh seed versus on a delivery, and I think that’s what we need there by the next couple of years and maybe within the next year we could be able to share along the corn projection for Brazil.

Q – David Silver

Okay, thanks a lot for that overview.

A – Terrell Crews

Thanks very much for the question.

Operator

Thank you, Ms. Foster, please continue with your presentation and closing remarks at this time.

Hugh Grant, Chairman and CEO

Thanks very much. I’d just like to thank everybody for joining us this morning. You know as pleased as well with the performance of the business in the quarter and in the half. The route is well ahead of us this growing season and in the growing seasons to come, its still long and – as Lord Surplassey say, “Stumble if you don’t keep an eye on the pro and one in the horizon”. Our job as a leader in this industry, and I think was talked about in this morning, as the business has been both of those things. Our brains are becoming stronger globally supported by an unparalleled library of international germplasm so as season. And I think momentum in this business has been generated through greater and accelerated adoption of our technologies, and Terrell talked to some of that in the North American market to be, and we are seeing that more and more as farmers embrace these tools. So acquisitions are delivering, our seed and biotechnology company has continued to make us their partner of choice to gain access to our genetics and to our technologies. But they say in the seed business, you can’t eat your own seed corn, so in the next eight weeks we will be planting seed corn, and as we plant that seed, that really gives us a front row seat into the opportunity not just for next year, but for us unfolding well into the next decade in this industry. So we appreciate your support and your questions, and we wish you well with the coming spring. Thank you.

Operator

Thank you, ladies and gentlemen, that does conclude our conference today, we thank you for your participation, and ask that you all please disconnect your lines. Have a great day everyone.

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Source: Monsanto Company Q2 2006 Earnings Conference Call Transcript (MON)
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