Monsanto Management Discusses Q4 2012 Results - Earnings Call Transcript

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


Greetings, and welcome to the Fourth Quarter 2012 Monsanto Company Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bryan Hurley, Investor Relations lead for Monsanto. Thank you, Mr. Hurley. You may now begin.

Bryan Hurley

Thanks, Rob, and good morning to everyone on the line. Thanks for joining our year-end earnings conference call. I'm joined this morning by Hugh Grant, our Chairman and CEO; Pierre Courduroux, our CFO; and also Brett Begemann, our President and Chief Commercial Officer. Also joining me are Manny Cruz, Bryan Corkal and Ashley Wissmann, my colleagues in Investor Relations. This call is being webcast, and you can access the webcast and supporting slides at The replay will also be available at that address.

We're providing you today with EPS measures both on a GAAP basis and on an ongoing business basis. Where we refer to non-GAAP financial measures, we reconcile to GAAP in the slides and press release, both of which are posted to our website. This call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risk and uncertainty, the company's actual performance and results may vary in a material way from those expressed or implied in any forward-looking statements. A description of the factors that may cause such a variance is also included in the Safe Harbor language in our most recent 10-K and in today's press release.

With this call, we address the guidance and growth drivers for our 2013 fiscal year. With the fourth quarter results in hand, we generated 25% ongoing earnings per share growth for the full year. Likewise, our results for the year in the quarter track near the expectations we laid out in our third quarter update, so we've seen the growth from the areas of the business we expected in fiscal '12.

Given the focus on 2013, Hugh will start today with an overview of our strategy and how we're thinking about growth this year and for the long term. From there, we'll have Brett Begemann walk through the operational drivers that give us confidence in our growth expectations. And then Pierre will lay out the translation of that growth into our guidance and financial outlook.

So with that, let me hand it to Hugh.

Hugh Grant

Thanks very much, Bryan, and good morning to everybody on the line. We've been talking and planning for fiscal year 2013 for a while now. By any measure, fiscal 2012 was a compelling year. Today, however, we turn our focus to 2013 and what our continuing growth looks like. We'll also emphasize how that growth happens. I'll let Brett walk you through the details and the milestones of our operational plans for 2013, and my focus will be on how those growth drivers come together over time.

There's 3 areas that I'd like to emphasize. First, the foundation for this growth is the success that we've had over the past 2 years, and I'm particularly proud of what Monsanto achieved in 2012. We delivered 25% ongoing EPS growth and a record $2 billion in free cash flow. And that speaks to everything that matters to our business. It reinforces the strong fundamental environment in agriculture. Equally important, it's the proof point in our business. We have the right growth strategy in place, we're executing well, we're focused on discipline and we're capturing the momentum in our business.

That sets up my second point. Because that strategy is in full swing, 2013 becomes a logical extension of 2012, driving growth as a continuation of what we accomplished this year, and that reinforces our confidence in 2013. We've had back-to-back years of strong performance. That compounding effect means we'll build off a significantly higher base. That's shown on Slide 5, where our ongoing earnings per share guidance range of $4.18 to $4.32 reflects mid-teens ongoing earnings growth from our 2012 endpoint.

And 2013 is setting up nicely. We're carrying good momentum in the U.S., we're on the front edge of some significant acceleration in Latin America, and the latest harvest data that we will share with you today reinforces our confidence in our products. A month and a half ago, as many of you were standing with me in a field in Illinois for our Whistle Stop event, I said at that time we thought that even as overall yields would be down, the relative showing of our products would be good. Now we have the data, and that's exactly what we see. Our yield advantage is shining through even in one of the most difficult seasons on record for our growers.

And finally, as good as I feel about this year, I feel equally good about our opportunity over a horizon of the next 5-plus years. As our growth is more global, we're adding a couple of new layers coming online each year. The intersection of our current business and our R&D pipeline gets even more exciting over the long term as we roll out significant new platforms that reinforce our opportunity as a yield company. In this past year, we tested Intacta and DroughtGard and our new Ground Breakers program. We added our Integrated Farming Systems and our BioDirect platforms, and that's a compelling opportunity that's balanced in the near term and offers significant upside in the longer term, giving us a strong view on how our growth shapes up well beyond 2013.

I also recognize that the opportunity for Monsanto in 2013 plays out on a much larger stage. With this year's terrible drought that underscores how stretched the world's grain resources are, and that reinforces that the drivers of Agricultural Productivity are real and are ongoing. The world needs sustainable productivity growth, and that creates a tremendous runway for agriculture.

We've emphasized the point that we're a yield company. And whether it's the business performance that drove our growth to this point or specific opportunity in 2013 or the long-term promise of our pipeline, what drives us is our ability to deliver yield in more ways than anyone else in this industry. That opportunity clearly begins in 2013, and on a call like this, the details really matter. So I'm very pleased to have Brett with us here today. In his role as President and Chief Commercial Officer, Brett's leading our near-term growth initiatives, so he's in the best position to walk you through these growth drivers in more detail. So Brett?

Brett D. Begemann

Thanks, Hugh, and good morning to everyone. I'm pleased to have the chance to join you this morning. As Hugh said, my focus is putting the operational plans behind our growth, so I'll highlight where I'm focused and how I'll measure success. I'll also echo Hugh's overall sentiment. Given the strong performance in our business and the momentum we carry into 2013, we're in a very strong operational position to deliver growth.

Let me start with Slide 6. We expect the drivers of our growth in 2013 to be reassuringly familiar, and we expect the growth will be divided fairly evenly between our core U.S. business and our accelerating international opportunity.

The first part of that 2013 growth revolves around the U.S., which continues to be the anchor for our business. That starts on Slide 7, as we'll continue to drive trade upgrades and mix improvement as we build out our platforms in corn and soybeans.

In 2011, we tipped from emerging opportunities to establish platforms for both Roundup Ready 2 Yield in soybeans and the Refuge-Reduction Family in corn. We expect to step up Roundup Ready 2 Yield soybeans again in 2013, reaching the range of 39 to 41 million acres, as we drive penetration in our brands and reach a critical mass among licensees. Likewise, we expect approximately 36 to 38 million acres for the Reduced Refuge Family in 2013, as we expand the offering of Refuge-In-The-Bag across all 3 of our products in that family.

As we drive the annual upgrade of our seed portfolio to the latest high-value germplasm, we're also well positioned to continue the gains we saw this year. With returns now finalized, we can definitely say our U.S. branded seed volume grew by the largest increment in the last 3 years. With share gains of more than 1 point in both branded corn and soybeans, our volume growth exceeded this year's market size expansion. That sets up for continued volume growth in 2013. That also plays out in price, where the mix benefit of our portfolio upgrade drives our opportunity. With our pricing cards out and plans in place, we see a total portfolio price lift in corn in the range of 5% to 10% from this upgrade, and the biggest driver is the mix effect, as this is less about price pass-through on apples-to-apples products and more about the opportunity created when we leverage our R&D engine to bring new, high-yielding products online.

With the seed production capabilities and infrastructure we have, we're also confident in supplying seed for the coming year. It's obvious that our business planning is happening against the backdrop of this year's devastating drought.

On a positive side, as farmers turn toward next year, seed is a priority. As I think about seed availability, 2013 is set up to be remarkably similar to 2012. Last year, storms and heat stretched our seed production. This year, it was drought. We've built our overall U.S. plan based on the reality that 2013 corn acres are likely to be in the same 96-million-acre range and soybean acres could potentially be higher than this year's 76 million acres. You'll see some natural cost pressure in a production year like this, but that balances against our hedging strategies, some cost pass-through and the continuation of higher acre ranges.

The final piece of this U.S. look is perhaps the most important, and that's performance, on Slides 8 through 11. With the dry conditions, corn harvest moved more rapidly, so there's more corn data available earlier this year. Soybean data is still coming in, but the anecdotal feedback has been good again this year. I won't do a deep dive, but let me give you a snapshot of the early results.

First, on Slide 9. In a year when overall U.S. corn yields are down significantly, DEKALB's relative yield advantage is as strong as ever. In fact, the lower yields magnify our performance, and this year is trending to be our second highest percent advantage in the last decade. It's a relevant data point because when DEKALB shows up this well in a tough year, I believe it cements our reputation for performance. Farmers see DEKALB shine in high-yield years and outperform even in the lowest yielding years. So they're seeing a degree of consistency and bottom line performance that influences purchases for many years.

If you go to Slide 10, this is a new layer of data this year. As the industry matures and each seed company uses different trait combinations, I believe farmers will focus even more on the bottom line yield performance regardless of the trait package. And you'll see in areas like the South and the Central Corn Belt where data is in, our DEKALB products consistently outyield the commercial products sold by our competitors, reinforcing our position as offering the premium, highest yielding total package.

If I move to Slide 11, one of the highlights of the regional look is our DroughtGard Ground Breakers results, particularly in a year like this. We compare our DroughtGard Hybrids specifically against the competitor's drought-marketed products. In this head-to-head data, the DroughtGard Hybrids we'll commercialize from Ground Breakers showed a yield advantage of approximately 5 bushels an acre. That reinforces the value of having a combined system of traits and germplasm and puts us into the commercial track for 2013 as DroughtGard becomes our next offering for the Western Corn Belt.

And before I leave the yield data, I'd make one final point. At this time of year, we get a lot of data from the U.S. because of harvest, but the trends and yield advantages we see in the U.S. are transferable to our international regions. Very simply, the differentiated performance in the U.S. comes from the strength of our germplasm and our ability to apply capabilities like markers and chippers. Logically, we're doing those same things in markets from Latin America to Europe. That strong performance translates directly to leading positions in the key countries and continued opportunity to grow our volume globally.

And that's the perfect segue to the second half of our growth, the international opportunity. This is an opportunity that's been in the shadow of the U.S. business for some time. But in the last couple of years, we've really seen some critical drivers emerge that shine the spotlight on our growing global growth. That begins in Latin America, an area where we see acceleration in 2013. In particular, we expect the continued ramp-up of the corn opportunity in Brazil and Argentina will become one of the single largest sources of growth in the next few years.

It begins in Brazil on Slide 12. The rapid trait growth to date has been driven on just initial trait penetration. But as we look to 2013, we'll get a double shot of opportunity, as we expect to both expand absolute penetration and continue the upgrade cycle. One of the keys for the growth is the upgrade to the first true double-stack called VT PRO 2. We expect that to step up from a small amount of our mix in 2012 to the second highest-volume trait in our portfolio in 2013. That's important because the trait gross profit lift as we upgrade to double-stack is between 70% and 80% per acre over our first generation product.

In Argentina, we have one of our largest seed footprints. And on Slide 13, you can see the key for the 2013 is upgrading that base from the double-stack to the triple-stack. We expect VT Triple PRO will be more than 1/3 of our branded mix in 2013. Like Brazil, the upgrade is important as there's a 20% to 30% trait gross profit lift over the existing double-stack. Both Brazil and Argentina also follow a similar pattern to the U.S., where the portfolio turnover drives a germplasm upgrade as well. And with the rapid upgrades going on, the collective Latin American mix upgrade is actually moving faster today than in the U.S.

The summer corn seasons are still shaping up in Latin America. Practically, with the commodity ratios favoring soybeans today, we expect corn acres in the summer season to come down some from last year's peaks. That's balanced by the second Safrinha season, where acres are expected to ramp up. Despite some of those acre shifts, early indicators for our business are showing up extremely well. In particular, the orders we have track squarely with our expectations for both total trait penetration and the expected trait upgrades for 2013. That means we're tracking well against our overall plans, and with the deliveries rolling out now, we'll see that positive trend in the first quarter results Pierre will cover.

Corn drives the 2013 opportunity in Latin America, but soybeans will come online over the next few years as a new layer. So it's an opportunity we're building plans for today. That soybean growth really revolves around Intacta, and it reflects how far we've come in building a system since the early days when Roundup Ready soybeans were grown illegally in Brazil. As many of you have followed, there have been legal challenges over the past 8 years in getting a royalty collection system in place for Roundup Ready 1. Our position has been upheld by multiple Brazilian courts, but the challenges continue. Just to emphasize, these suits are centered on Roundup Ready 1, not Intacta. We recognize that the various cases will continue through the legal system, and that takes time. But practically everything is operating as usual with Roundup Ready 1, and we continue to feel confident in that legal process.

If I shift to the growth opportunity, we're on the front edge of the opportunity for Intacta, shown on Slide 14. While this year is financially immaterial for earnings, it's a major strategic jumping off point for Intacta. We see Intacta as a step change for farmers, and farmers' own data for our Ground Breakers program showed yield benefits of greater than 4 bushels an acre and helped create more than $80 in new value on every acre. We're using 2013 to position ourselves for a rapid ramp-up when we expect to hit the broad commercialization in fiscal 2014. Most importantly, with in-country approvals, we can build on the initial Ground Breakers testing from fiscal year 2012 while we finalize everything ahead of commercial rollout.

This year, we have expanded availability of varieties and overall acres with more commercial growers. We reach more customers and a larger geographic region, which builds the base of customer experience. At the same time, we're building the seed and varieties we need to be in a position for next year. Taken together, that extra customer experience and focused commercial preparation puts us in a good place to make sure we showcase Intacta's breakthrough benefits when it hits the commercial stage.

The last highlight I'd offer revolves around another key piece of our global business, and that's our germplasm growth on Slide 15. In 2013, growth in the corn business isn't limited to top-of-mind geographies like North and South America. We also expect the corn business to grow in conventional seed markets, ranging from Mexico to Western Europe.

The best near-term example of that 2013 opportunity is Eastern Europe, on Slide 16. The corn footprint in Eastern Europe is as big as Brazil, and it's expanding. In the past few years, we've effectively doubled our share, outpacing a growing market. Just like the U.S., there was a significant drought in Eastern Europe. And the rebound expected next year, as corn acres continue to remain strong, provides a strong backdrop for one of our fastest-growing businesses.

I've focused on the drivers at the heart of our core business for 2013. From an operational standpoint, we're focused, we have a consistent strategy and we're entering the year with momentum. The last 2 years have been important in confirming our strategy and reigniting growth, and that's one of the strongest sources of confidence for me because we have the tools we need to drive growth. We just have to focus on execution. And that means our growth is backed by strong operational plans. We've turned an important corner as a business, and we're focused on turning the momentum we've started into real growth and a growing global business.

With that, let me hand the time over to Pierre, who will give you the specifics of how this translates to our guidance outlook for 2013.

Pierre Courduroux

Thanks, Brett, and good morning to everybody on the line. Today, I'll focus on translating the fiscal year '12 endpoints and the priorities Brett described into the core elements of our earnings and cash guidance for 2013. But before I do so, let me start on Slide 17 and summarize my views on where we stand from a financial point of view.

First, as Hugh and Brett said, we are seeing our growth continue, and we expect mid-teens ongoing EPS growth in fiscal 2013. This is growth off a higher compounded base, and it speaks to the strong engine we have in place. But in my role, I'd also like to know that we've built our plans in ways that accommodate the normal variability in agriculture. And when I step back, I feel good that our guidance is based on growth that's balanced and achievable.

Second, we continue to be able to translate our earnings growth into free cash. The efficient translation of earnings to cash is always a focal point for us. So the reality that we have generated approximately $2 billion in earnings and $2 billion in cash in 2012 is a compelling proof point for me.

And third, as we translate the operation plans Brett described, we're certainly becoming more global, more diversified, and that is creating better balance and flexibility for us. Our business profile is now more global, and this gives us the opportunity to manage variability and meet our underlying earnings commitments.

I think the best way to see the translation of the 2013 operation plan Brett laid out into guidance is to walk you through the key lines of the financial statements on Slide 18. If we start with the bottom line earnings, our ongoing EPS guidance range tracks the mid-teens growth off the FY '12 endpoint of $3.70 per share, which translate to $4.18 to $4.32 per share for fiscal year '13.

Above the line, we expect our Seeds and Genomics gross profit will continue to grow. In 2012, our Seeds and Genomics gross profit crossed the $6-billion mark for the first time, coming in at nearly $6.1 billion. For 2013, we'll build on that new level, as we expect to reach segment gross profit in the range of $6.55 billion. The strongest driver of our segment growth in 2012 was our corn gross profit, and that will be true this year as well. With the continued build-out of the U.S. and the acceleration in Latin America, we expect double-digit gross profit growth from our corn business. That is complemented by contributions in growth from soybeans, vegetable and our other seeds and traits crops. After a challenging year in 2012 for vegetables, we expect the beginning of the return to growth. We have a modest positive GP growth contribution beginning in 2013.

So we expect this growth to be offset somewhat by cotton. As commodities favor corn and soybean acres in 2013, we expect significantly lower planted cotton acres in the U.S., and that will reflect on our cotton business performance.

The other above-the-line contributor is expected to be Ag Productivity. For fiscal year '12, Ag Productivity generated $986 million in gross profit, with year-over-year growth that reflects strong performance across the board. We achieved strong volume and mix in Roundup, we've had another good year in our lawn-and-garden business, and we're seeing some growth in our selective chemistry offering.

Our 2012 results confirm how we think about Ag Productivity. We've reset the strategy, and now it's really approaching a steady state. We've seen a positive lift in the gross profit as we've been able to implement the strategy we laid out 2 years ago, and we have delivered on execution. For 2013, we don't see significant shifts in the strategy or financial profile for this -- from this year, and we expect total gross profit for this segment in the range of $1 billion.

Moving below the line, let me now highlight another key area on the financial walk-through. For our expenses, we are focused on maintaining our discipline, so our spending grows at a lower rate than our top line, and that creates leverage for bottom line earnings. As we look at the operating expense lines of SG&A and R&D combined, for 2013, we expect those to grow at a rate lower than our sales growth.

We ended 2012 with SG&A at about $2.4 billion, which was consistent with our revised guidance during the year. The year-over-year uptick reflects the acceleration of our business during the year, as we used some additional SG&A in the form of commissions and some investments in our people, structure and organization. Going into 2013, we expect SG&A to be in the range of $2.55 billion.

On the R&D line, we ended fiscal year 2012 with an R&D spend of $1.5 billion, which also reflected our expectations of higher spend with our revised guidance during the year. We were able to make some incremental investments in R&D in 2012 to speed the development of key projects like our Latin American launches and new platforms like our Integrated Farming Systems and BioDirect work. Since we made those investments in 2012, we expect only modest incremental growth in 2013, with total R&D spend in the range of $1.53 billion.

The final factor in our earnings guidance is the tax rate. With the year-end rate right at 30% for fiscal year 2012, we expect our annual tax rate will maintain a similar range in 2013 at 30% to 31%.

If I bring all those P&L elements together, let me tell you how I see the trends that drive earnings for 2013 on Slide 19. First, I expect that our Seeds and Genomics gross profit growth will be split almost evenly between the U.S. and our international regions. We may see the balance of that growth tip toward one side or the other based on the actual business performance throughout the year, but as I look at the big picture of growth, there is good overall balance as the strong growth rates in international regions like Latin America provide a nice complement to the expansion of our larger core business in the U.S.

Second, as I look at the components of the 2013 growth, they are the same sources we saw driving our 2012 performance. The largest contributors are mix and volume. On the mix side, the technology adoption and portfolio upgrades Brett described drive this opportunity. And we will complement that with additional volume growth as the expansion of our base business in key geographies continues to drive nice overall volume growth for the company.

That sets up my expectations for the flow of earnings throughout the year on Slide 20. The first proof point of the operational drivers comes in the first quarter. Last year, we saw a significant increase in earnings coming through Q1 as Latin America became a larger contributor. This year, we see similar significant growth as we project Q1 to be another pronounced increase versus last year, and that reflects 2 big factors.

The most prominent is the acceleration of the corn opportunity in Latin America, as the trait upgrade cycle continues the trends we saw beginning last year. Adding to that in 2013, is some positive timing and shifts in the flow of the U.S. business, which means we expect to see more of the U.S. growth showing up in Q1 this year. With a trend to early order, we expect the possibility of some earlier shipment this year, and we are also seeing some overall structural shifts as more seed is moving in the first quarter as our volume grows and we manage the logistics around getting seed placed in the distribution system.

The majority of our earning still comes in the second and third quarter, as they reflect the large markets in the northern hemisphere including the U.S. But with a shift in the U.S. seed positioning benefitting Q1, the growth in those quarters will proportionally be lower, although we still expect an increase for the combined Q2 and Q3 period over last year.

The last piece I'll cover is the outlook for free cash flow on Slide 21. We generated a record amount of free cash flow in 2012, generating more than $2 billion in total free cash. That is important not just because it's a record, but it's actually one of the strongest indicators to me that our execution is translating the business opportunity into bottom line financials.

If you look at that $2 billion, what you see is that a good portion of our net income growth directly flowed through to free cash, and that's a reflection of 2 key factors: number one, our collections remain strong as the record free cash flow also reflects a record level number of collections for the full year; number two, in 2012, we maintained balance sheet discipline with a strong focus on working capital elements and were able to see the benefit of the restructuring work we undertook over the past few years that helped offset the natural working capital increase you'd expect as a part of a growing business. Most importantly, we expect our business performance and discipline will continue to be reflected in our cash generation capability in 2013 and project free cash flow in the range of $1.7 billion to $1.8 billion.

With that outlook, we expect to continue the translation of earnings into cash while accommodating for the funding of growth within our free cash. I'd highlight a couple of key considerations:

First, the driver for cash generation will continue to be our net income.

Second, with the growth opportunities in our business, we have the confidence to make some incremental CapEx investment. As we grow our footprint in regions like Latin America and Eastern Europe, we will put some capital in place that will support our next rounds of growth. So while our CapEx has been tracking close to depreciation and amortization for the past couple of years, those incremental investments this year will mean CapEx is expected more in the range of $800 million to $1 billion.

Third, with growth, there is also some natural investments in working capital. Practically, I expect these to show up as step-ups in inventory and receivables across our business. Logically, these will support our growth engine in seed and traits globally and will help adjust through the steady-state environment of our Ag Productivity business.

Our 2012 performance positions us well to both continue our cash generation in 2013 and support our continuing opportunity, and this naturally leads me to how I think about using that cash. Because we are committed to converting earnings into operating cash, I view that cash as an important tool in continuing to invest prudently for growth in the business and return value to our share owners. So we will focus our cash development around investments and acquisition opportunities that build our business footprint and technology capability, but we will also maintain our focus on returning value to our share owners through share buybacks and consistently paying out a portion of our earnings as dividends.

While an earnings call like this turns the attention to the fiscal year ahead of us, there are 2 pieces of context I don't want to lose as we lay out guidance: First, our priority in 2012 was to deliver on our guidance, and we did that. With ongoing earnings growth per share of 25%, we have a strong business engine in place that sets up 2013. Second, as CFO, I want to see our business strategy translate to our financial statements. With the operation plans Brett laid out, we have a very good line of sight of the detail that drives our opportunity, and that reinforces my confidence in our ability to deliver the next layer of growth in 2013.

With that, let me turn it back to Bryan for the Q&A period.

Bryan Hurley

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

Question-and-Answer Session


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

Vincent Andrews - Morgan Stanley, Research Division

Just wondering -- I guess I'll actually ask a non-fundamental question. Your -- You generated -- or you now have $1.2 billion in net cash and your cash balance grew by $711 million, and your dividend is $642 million. So I'm just curious. I know you bought some businesses as well this year. I'm just curious, why not raise the dividend more than you have? Or what should we be thinking about along those lines?

Pierre Courduroux

So thanks for the question, Vincent. Well, the way we've been thinking about our deployment of cash, I mean, has been very consistent over the last couple of years. I mean, we are committed to growing our business. And as you mentioned, we've been making some investments and acquiring a couple of companies. And this is still an area we are actively looking into. And in terms of the return of the cash to the share owners, our board allowed us another $1-billion buyback plan. And as you mentioned, we've also raised our dividends by 25% in the previous quarter. So we are very, very conscious of returning the cash to our share owner in a disciplined way as well. And one of the key things is the sustainability of the commitments we make. So when we raised our dividend 25%, we are very committed to continuing this growth and being very focused on that, but we also have to manage the opportunities we have on the acquisition side. So it's always a balance we have to maintain. We've been very active last year. I mean, actually, over the last couple of years, we returned twice about $1.1 billion to our share owners in between dividends and buyback. And that's really something we are focused on.


Our next question is from the line of Bob Koort of Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc., Research Division

I think maybe Brett commented that the full season corn numbers in South America might be a little bit lower as farmers plant more soy acreage. So I'm wondering if you could just talk about the profit implications there. And then secondly, what you might expect in the summer corn season and maybe the relative intensity of hybrid corn in both those seasons.

Hugh Grant

Bob, thanks for your question. I think you really hit at the heart of one of the issues that Brett talked about this morning. So I'll ask him to say a few words, but the way I think about this is we feel really great about the season. And as Pierre mentioned, we see the first quarter shaping up to be very, very significant. So if you don't lose sleep in the quarter and you look at the total season in Latin America, it's shaping up real nice. But, Brett, maybe a few words between first season and second season corn.

Brett D. Begemann

Thanks, Hugh. Bob, I think that something that's really relevant in South America, is the fact that farmers have that option to look both at first and second season. So with the commodity prices pointing them towards soybeans in the first season, it -- many of them are going that way, which will put pressure on corn acres, but they have the opportunity to come back in the second season, where we expect that acres will rebound in corn, particularly in Brazil, to where you won't see such a substantial reduction for the whole year. But to Hugh's point, the season is setting up very well. As we track our business, looking at how our orders match up with our expectations for our first quarter, we're very much on track.


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

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

I have a two-part question. In your goals for the Genuity family in corn for 2013, you're up to 36 to 38 million acres. Will you be roughly fully penetrated at that point? Because that 36 to 38 million acres, I think, is about equal to your branded corn acres in the United States. And secondly, I think your target this year was to grow your offshore gross profit at the same rate as your -- or to have your incremental gross profit be half U.S. and half offshore. How did you actually do? That is, you grew about $1 billion in gross profit. How much came from the U.S.? And how much came from offshore?

Hugh Grant

Some of the -- I'll maybe ask Brett to say a few words on potential and Pierre on gross profit. The headline, Jeff, on corn is if you look at this year and you look at next year, corn is the driver for Monsanto. So corn growth is really our wheelhouse. And we saw, Pierre, 25% GP growth year-on-year in corn. So it's doing very well and a big piece of that is the platform. So, Brett, maybe a quick word on platforms. And then, Pierre, a dissection on domestic versus international.

Brett D. Begemann

Sure. If you look at the U.S. this year, it's another significant step-up in our refuge-reducing family, looking at 36 to 38 million acres. But that's not necessarily the end, Jeff. You should think about it in the context of the whole market and recognize that VT Double PRO RIB Complete is a part of that now, which starts to expand that bigger than where we used to be with the old triples, which is the measuring stick that often gets used. So there is still growth beyond what we see that we're going to this next year.

Pierre Courduroux

And as for the breakdown of gross profit in '12 and in '13, I mean, the way we've been thinking about that is, I mean, we've got 2 growth engine: one in the U.S. and the other one x U.S., with the x U.S. growing faster from a smaller base. And both in 2012 and 2013, we are expecting to see, I mean, equivalent growth. I mean, the breakdown, as we mentioned, is -- will be depending on how the business evolves during the year. But we are really looking at those 2 engines to provide about the same level of gross profit growth.

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

Right, right. So what happened in '12?

Pierre Courduroux

We were about this half and half, very close to that.


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

P.J. Juvekar - Citigroup Inc, Research Division

Just a couple of things on Latin America. When do you expect the China approval for Intacta? And could the Intacta ramp be faster than any of your previous products, because you would have had 2 years of groundbreaking -- Ground Breakers trials? Related to that, if I may ask one more about -- you mentioned that Argentina has been a challenge to get paid in Argentina. I was just curious about your gross margins in corn in Brazil versus Argentina.

Hugh Grant

Okay. So thanks for the 2 questions. So the way I would think about Intacta, over 10 years, we've learned that you never speculate on regulatory approvals or when they're going to come. But our position hasn't changed. So 2013 is all market activity. So it's getting the product in more farmers' hands, getting on more acres and continuing to expose the technology to growers. And then 2014 is our commercialization phase. So we said from the get-go that '13 would always be de minimis and that '14 would be the year. And I feel -- I continue to feel confident from a Chinese point of view that we will meet that '13, '14 timeline in terms of expanding Ground Breakers. In terms of acceleration, I mean, it's hard -- we're talking about something happening in '14. It's hard to say but everything I hear from growers down there, there's tremendous enthusiasm. There's a lot of pent-up demand. They're now relearning the system. It's an intuitive shift. So I think it's going to be big, and I think it's going to be big fast. And then in corn, a quick word on...

Pierre Courduroux

Yes, yes, regarding the specific question around the margin, P.J., regarding corn in between Brazil and Argentina, you're looking at very similar types of margin in both countries because remember, I mean, the corn, being a hybrid, I mean, you don't have the issue you had in Argentina with soybeans. So the value-capture mechanism are about the same and the level of margins you're looking into are very similar in both countries.


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

David L. Begleiter - Deutsche Bank AG, Research Division

You've given your forecast for flattish corn acres in the U.S. for next year. Do you think you can grow corn volume and gain corn share in the U.S.? And do you have the seed supply to do both?

Hugh Grant

Yes and yes. So it's kind of interesting because we're sitting here on the run-up to Thanksgiving and we're talking about flattish acres of a number of 96 million acres. I think that the country's got the absolute capacity to plant that much, and there's a pent-up demand for that kind of volume. It's going to get down to what sort of spring. The country has to get 96 million acres in the ground. But based on the momentum that we've established this year and looking at the performance differentials in our germplasm, we feel pretty good about our supply and we feel pretty good about our performance leverage. So the early feedback from growers has been very encouraging, and I think the team has done a really nice job on our pricing. So never done until it's done, David, but I'd say the outlook is pretty good.


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

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

Just very quickly, any comments on the impact of the farm bill kerfuffle on order patterns in the U.S. in Q1 versus Q2? And as you look at the 5% to 6% advantage for DEKALB, as you look at the advant [ph] changes in your breeding platform, can that -- can you break out of that and get better than a 6% advantage versus your peers in 2 to 3 years?

Hugh Grant

So on the farm bill, no. I'd say no impact. Obviously, growers are watching that, but the headline this year was a really tough drought and a very early harvest, and they're looking at knocking out of the ballpark next year. So there's an anticipation of support, but I don't think it had any impact on our book patterns. And then, Brett, if you -- I don't know if you had any comments.

Brett D. Begemann

Yes, I think to the other part of your question on the yields and the differential, we're obviously extremely pleased with the differential that we're seeing this year in a really tough year, which is really consistent with what we've seen in the outstanding years before. Keep in mind the point I made though. As you go to fully traited products and you start looking at things like DroughtGard coming into our portfolio, Corn Rootworm III coming into our portfolio, we start to balance out that whole portfolio and we're looking at the absolute performance of the overall system. So yes, I think there is a real world opportunity for us to continue to drive our advantage in the marketplace as we build out that portfolio of products.

Hugh Grant

Here's just an extraordinary factoid. We had our second best yielding year in probably the worst crop year in 30 or 40 years. And I think that really underscores the durability of the genetics, and it shows that even in really tough years, you see that performance shining through.


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

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

You talked about slower opportunity next year in cotton in the U.S., which obviously isn't too surprising. Can you tell us what happened in this fourth quarter, which looks a little light, and how much of that was India and what your outlook for India is next year for cotton?

Pierre Courduroux

So as you mentioned, the final results in cotton in the fourth quarter was -- were lower than what we've seen in the previous year. So the first place to start with is something we had been talking about since the first quarter. This is the reduction coming from the pull-forward in the first quarter of some Australian revenues, which was accounting for about $0.05 of EPS. So this one aside, we had larger returns actually than we thought we were going to get in the U.S. So this has been driving part of the downside. And we've also, I mean, mentioned the fact that in India, we were not looking at a great year there and it's also been part of the equation. But the largest part, definitely, has been Australia, which we were anticipating, and then the pullback of acres in the U.S. and also to a certain extent in India. When we look at next year, we're looking at, I mean, acres pullback of anywhere in between 10% and 20% across the globe. So that's why we are conservative and willing to signal that we're not expecting our cotton next year to be outperforming.

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

10% to 20%, okay.


Our next question is from Frank Mitsch of Wells Fargo Advisors.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Hugh, you obviously performed very nicely this year, certainly year-over-year and certainly relative to your guidance. So speaking of that, what couple of factors would you attribute doing materially better than your original guidance? And likewise, as we look out at -- assuming we have this call on October 2013 and you do better than your original guidance, what might be the areas of upside there? And conversely, should you not perform as well as your expectations, what might be the areas that might be the factors behind that?

Hugh Grant

Thanks for the question, Frank. So I am very pleased with the performance this year. And the point we made in the call is '13 is a continuation of '12. So I think from your question -- the logic flow from your question is what we set out in '12 in terms of performance momentum carries into '13. And then if you dial that down a notch, a big piece here is cotton performance. And obviously, a piece of that is driven by acres albeit in a tough year, and we're anticipating that those acres will come back next year. So it's the strength of technology, the performance of cotton, the conservatism in our pricing, and that sets up the momentum that we're getting. It's never done until it's planted in the ground, but the early feedback from our grower customers has been very positive as we look into '13. So that's how it's set up, and I'm delighted with the performance this year. I'm really pleased on cash generation. And the dilemma of how we repatriate that cash is a really great problem to have, but that's how we look at '12 and '13. It's that the heart of this is corn. But the second one I would call out is really compelling performance in our soybean platform. And we've been aggressively switching those technologies, and that yield data is still coming in, Frank. We'll update you later in the season. But the early read on our soybean platform has been very, very encouraging.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Is there a geography that you can point to that you think might be a source of upside for you?

Hugh Grant

You mean globally?

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division


Hugh Grant

Well, we -- I mean, we talked a little bit about Latin America and Eastern Europe and -- 10 years ago, hard to believe we've been talking about Eastern Europe, but we see -- we're going to have to invest and we're going to have to spend CapEx to unlock those markets. But we see continued opportunity in technification in Brazil and Argentina. And in the mid-term, we see real opportunity in Eastern Europe.


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

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Hugh, I wanted to follow up on U.S. corn pricing and your outlook there. You've talked about overall realizations being up 5% to 10%. My understanding was you were closer to 10% in 2012. Are you just being conservative this early in the season? Because I would think between your genetics renewal, the mix upgrade and certainly even less discounting than last year, that there is potential for further upside in corn pricing in -- or greater growth rather in '13 than in '12.

Hugh Grant

Don, thanks for the question. I'd maybe ask Brett to jump in here. But the way I would think about it is the pricing is done. It's largely done. So it's communicated and then -- and we were early communicating pricing this year because it was important, as growers were getting in the fields and looking at depleted yields, that they knew where they stood. So we've priced our portfolio. The industry, I think, is pretty much priced now, Brett. So the upside is going to be on, I guess, how aggressive the discounting is and how swiftly the season goes. But we've pretty much baked that cake and it's -- the stall is set out in that 5% to 10% range one more time. So it's going to get done on performance and volume and also the mix effect with technification. We're seeing really, really nice lift as growers look for those high-tech, better performing products. But, Brett, I don't know if you've got anything that you'd like to add.

Brett D. Begemann

Just a short add-on on the end of what Hugh was describing on the mix effect. Hugh said so. When you think about the 5% to 10%, that's what happened this past year to move us towards the higher end. It's the opportunity for next year as we drive to the higher-traited packages in the marketplace that give us the biggest lift, and that's where we'll see that occurring, so -- but all the rest of the details are out there. So I don't see it being significant at this point.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

And, Brett, just a clarification. You said corn market share up more than 1%. How much more than 1%? And was all that growth due to VT Double PRO?

Brett D. Begemann

Well, all the growth was not due to VT Double PRO. It was a significant contributor to our growth, but it wasn't all that. Our entire portfolio grew very nicely across the whole U.S. this year, and we're clearly up more than a point when I look at all the numbers. But you know as well as I do, there's so many moving parts on that with what were the absolute acres and harvested acres, et cetera, et cetera. So I feel really good about -- it's more than 1 point, but to qualify it much tighter than that's difficult to do.

Hugh Grant

But you'd say in corn and beans probably the best year in the last 3.

Brett D. Begemann

Definitely the best in the last 3.


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

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

A question on your capital budget for fiscal 2013. If I look at the range of $800 million to $1 billion and take the midpoint there, it looks like it's up perhaps 35% to 40% versus the $646 million that you spent this year. So I'm just wondering if you could elaborate on some of the drivers behind that in terms of key projects and whether or not there might have been any deferral of expenditures out of '12 and into '13, just to help us understand the increase a little bit better.

Pierre Courduroux

No, actually, Kevin. And that's a great question and we tried to touch on it in the discussion previously. What we are recognizing today is that based on the strength we've seen outside of the U.S., both in Eastern Europe, in Argentina and in Brazil, I mean, we now feel very comfortable that over the next couple of years, we are going to be needing more capacity to provide the market because we've enjoyed real success in those 3 areas. And this is where, definitely, we're going to be putting some steel on the ground to increase our manufacturing capacity in those area. And really, the comparison from 1 year to the other is linked to those incremental production capacity that we're going to be putting on the ground. So that's really -- we are now at a point where we feel very comfortable that we can invest in those countries, because we've got the market to support those capacity.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

So just as a follow-up, Pierre, is it seed production that you're investing? And what sort of specific investments would you envision?

Pierre Courduroux

So this is definitely seed production. I mean, it's dryers. It's, I mean, really, seed manufacturing capacity that we are investing in Eastern Europe, Brazil and Argentina.


Our next question is from the line of Michael Picken of Cleveland Research.

Michael Picken - Cleveland Research Company

Just a couple of quick questions. Just touching on the vegetable business, if you could kind of walk us through what type of growth rate you might expect for fiscal '13, and when you think about kind of between Europe and the U.S., kind of where that growth is coming from. And then similarly, just on cotton. I know we've touched a little bit on India, but if you could touch a little bit on Australia as well because that sometimes is a driver in the first quarter.

Hugh Grant

Yes. Michael, thank you. Pierre, maybe you can say a few words. And I think, veggies, this isn't going to be a breakout year, but it will be a return to normalization. And then cotton, there is a lot of moving parts between India, Australia and then shrinking acres here at home.

Pierre Courduroux

Yes. When we are looking at our veggie business, the way we've been planning, I mean, obviously within a range of different outcomes, but we are looking at single-digit growth this year for our veggie business. We've been redeploying our resources. And you mentioned the U.S. and Europe. Actually, the --- as we mentioned in previous calls, the veggie business is redeploying towards the Middle East, towards North Africa, towards Eastern Europe, and we are reflecting those changes in our planning. I mean, we are expecting now that the Europe business will be stabilized. We are still seeing growth in the American business. And most of the growth is going to happen in the Middle East and in Eastern Europe. So that's the way we've been planning. I mean, obviously, if there is any opportunity it will be there, but that's the way we've been planning, so single-digit growth as far as our veggie business is concerned. Regarding cotton, I mean, you mentioned Australia as one key factor. So we're not expecting the performance in Australia to be as good as it was last year, but we are still looking at high acres, planted acres, in Australia. There is water in Australia. It may not be as good as what we enjoyed this year. So specifically about Australia, this is not the area where we're going to see the massive pullback. We'll see the pullback in the U.S., India mostly. So that's the way we've been planning.

Bryan Hurley

And Rob, this is Bryan. I think we're running just a tad bit long. So that's probably the last question we have time for. Maybe if we could shift to just a quick summary by Hugh before we close so that we try to respect everybody's time here.

Hugh Grant

Thanks very much, Bryan. So thanks again for joining us on the call this morning. I think as you hear our remarks and also the questions, we turn our focus to 2013 today and the opportunity that we see in the new fiscal year. And there is real opportunity in this new fiscal year. We're optimistic in how we see that playing out. So let me try and summarize in 3 points how we see this setting up:

First of all, we, here at Monsanto, feel very good about 2012. We focused on our customers and we recaptured the momentum in our business, and we put together back-to-back years that underscore our growth mode.

I feel equally good about 2013 as a continuation of '12. We'll continue our strategy, and that gives us a clearer line of sight on our growth than we've had in some previous years. And that, in turn, reinforces our confidence.

And finally, as we highlight our growth in 2013, it's growth that's really underpinned by strong operational plans, and Brett covered some of them today. It's also coming from more sources on a more global scale. And that, obviously, speaks to increased CapEx and expansion. And that underscores what we see as our continuing opportunity against a backdrop of a world that needs more agricultural productivity over a long runway.

So thank you very much for joining us today, and we look forward to sharing these plans as they unfold in 2013 with you.


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

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