Monsanto Company F4Q08 (Qtr End 08/31/08) Earnings Call Transcript

| About: Monsanto Company (MON)

Monsanto Company (NYSE:MON)

Q4 2008 Earnings Call

October 8, 2008 9:300 am ET


Scarlett Foster – VP IR

Hugh Grant – Chairman & CEO

Terry Crews – CFO


Jeffrey Zekauskas – JP Morgan

Vincent Andrews - Morgan Stanley

Michael Judd - Greenwich Consultants

Frank Mitsch - BB&T Capital Markets

Peter Butler - Glenhill Investors

Robert Koort - Goldman Sachs

Kevin McCarthy - Banc of America Securities

Laurence Alexander - Jefferies & Co.

Mark Gulley - Soleil - Gulley & Associates

Prashant Juvekar - Citigroup

Donald Carson - Merrill Lynch


Welcome to the Monsanto fourth quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Scarlett Foster, Vice President Investor Relations; please go ahead.

Scarlett Foster

Thank you very much and good morning to everyone on the line. I'd like to welcome you to our 2008 fiscal year end conference call, and I'm joined this morning by Hugh Grant, our Chairman and CEO, and by Terry Crews, our CFO, and also joining me this morning and Laura Meyer and Bryan Hurley, my colleagues in Investor Relations.

Before we begin, I'd like to remind you that we're webcasting this call and you can access it at our website at The replay will also available at that address.

For those of you who are on our website, the slides for this call are posted on the Investor Relations information page; we’ll refer to the page numbers which are on the bottom right-hand side of each slide.

Additionally, on the website you'll see that we've published the final Biotech Acreage report which has been updated from the preliminary forecast we shared in June.

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

I need to remind you that this call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve 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 statement. A description of the factors that may cause such a variance is included in the Safe Harbor language contained in our most recent Form 10-Q and today's press release.

Just a week ago as we were preparing for this call we were ready to go through a very detailed review of 2008 along with a forecast for 2009 and a revised outlook for our 2012 commitments. It would be an understatement to say that much has changed in just seven short days.

We’re justifiably proud of our 2008 results but we felt it would be disingenuous today if we did not address the concerns we’re hearing from you. Our brand and the premium on our brand is our obsession with innovation and the execution of that innovation in the marketplace.

Today we want to reassure you that our focus on delivering innovation to farmers and the growth that stems from that has not waivered. That said, we want to tackle head-on questions about our pricing flexibility, farmer financial health and global demand for grain, and ultimately about our ability to grow in this less-then-stable environment.

To that end I’m going to do a high level review of 2008, Terry will tackle 2009 and place our growth in the context of some of the issues we’re managing. Hugh will look out to a revised set of commitments to 2012 and how a company like Monsanto can be so bold as to raise projections that are four years out in a world that has become very day-to-day.

If you would turn to slide four, we provide you with a snapshot of our results for the fourth quarter and the year. At the highest level net sales rose 35% for the fourth quarter and 36% for the year, predominantly because of the value associated with expanded seed market share, accelerated trait penetration and a rejuvenated roundup business.

This is reflected in gross profit which increased by more than 45% for both the quarter and the year. As you know gross profit is the most meaningful measure of our business and we break that metric down for you further on slide five.

A couple of highlights are worth noting for the quarter and the full year, one corn gross profit was down for the quarter but that would have been as we would have expected because of the earlier timing of US sales.

In the quarter we also saw a great start to the Latin American season and today we can tell you that we are sold out of our double-stack trait in Argentina and we are sold out of our YieldGard Corn Borer trait in Brazil.

For the full year corn gross profit crossed the $2 billion mark for the first time reaching nearly $2.2 billion. This absolute gross profit even outstripped the resurgence in the roundup business and it speaks to the success of our yield-driven strategy.

Two, vegetable gross profit nearly touched $400 million for the first time and has grown 33% from the first full year of Semillas earnings in 2006.

Three in total gross profit for seeds and traits grew 28%, our fifth consecutive year of 20% plus gross profit growth for this segment.

For branded roundup price was the largest contributor to gross profit growth in 2008 with some of our most significant price increases coming in Latin America and Europe. We ended the year with branded prices roughly 10% above the high end of our projected $16.00 to $18.00 per gallon band.

The average US price in 2008 landed squarely in the middle of that band. For the full year gross margin reached 54%, two years ahead of our earlier projection. The margin acceleration in 2008 was a function of the margin expansion in roundup.

Margins for the seeds and traits segment in total were flat at 61% as we had forecasted they would be in our third quarter call.

The gross profit growth dropped to the bottom line with some modest spending leverage. SG&A as a percent of sales declined to 20% and R&D as a percent of sales was nearly 9%.

As we have committed and as you should expect we once again converted earnings into operating cash. As you see on slide six, free cash flow reached $772 million on the strength of growth in net income. This level of free cash was generated even as we reinvested over $1 billion in acquisitions and technology investments to support our seeds business.

We also reinvested an additional $918 million in capital expenditures over 60% of which went toward new or expanding seed facilities. Another $419 million of cash was returned to share owners through dividends and just over $360 million through share repurchases, more than $200 million of which were bought during the fourth quarter.

Perhaps the best single measure of our success in 2008 was reflected in return on capital reaching 24%, up from 15% in 2007. This improvement reflects the magnitude of the returns realized against prior investments made in enriching our seeds and trait portfolio, upgrading our seed production facilities and processes and ensuring our world class, lowest cost position for manufacturing roundup.

So with that snapshot for 2008, I’d like to turn the call first to Terry.

Terry Crews

Thank you Scarlett and good morning to everyone on the line. Even in the best of times a CFO has to balance three things; earnings, cash flow, and the balance sheet and the key is to do all these things simultaneously and never sacrifice the future for the present.

As a company driven by technology we have to be innovative and creative in order to bring groundbreaking products we are known for to farmers. But on the flipside we can’t be clever about execution.

We have to be superb at the basic blocking and tackling that delivers the financial results and operational excellence you and our customers have come to expect and that we demand of ourselves.

As Scarlett summarized, 2008 was a compelling year on a number of fronts. Growth of this magnitude is impressive. But I’m personally proud that our people were able to grow the business at a record breaking gross profit levels while maintaining the financial discipline that allowed gross profit to flow through to earnings and ultimately be reflected in free cash generation.

We neither sacrificed nor short changed this year’s business for tomorrow’s expansion. We remain unique as a technology oriented company in the Ag industry, in our ability to grow today and to create for tomorrow while at the same time having the flexibility to return value to our share owners across multiple mechanisms, all derived from the value that we return to farmers worldwide.

If you turn to slide seven, our performance in 2008 is the pillar for our outlook for 2009 and ultimately to our outlook for 2012 which Hugh will address shortly. As we step from 2008 to 2009, we see a path to deliver ongoing EPS of $4.20 to $4.40 for fiscal year 2009.

This represents a growth of some 15% to 20% from fiscal year’s 2008 ongoing EPS of $3.64. Once again we’ll more then convert the earnings into operating cash and would expect to generate in the neighborhood of $1.8 billion in free cash.

I’d like to start with the income statement for 2009 and take you through the factors that are going to contribute to this earnings growth. One of the key questions about our ability to grow earnings is our ability to price to value and I’ll address that as well.

Let’s begin with gross profit; on the gross profit level growth will be driven by our seeds and traits business. We expect this segment to deliver gross profit of approximately $4.5 billion to $4.6 billion or growth of 15% to 18%.

Within this segment we expect corn gross profit to grow by 25% to 30% approaching $2.8 billion of gross profit. Our vegetable gross profits similar to corn should see growth of the 25% level with gross profit of approximately $500 million, for the first time through both our organic growth and the addition of our full year sales from De Ruiter.

Gross profit in both our soybean and cotton businesses are expected to be relatively flat compared with fiscal year 2008. Planted soybean acres are expected to be down slightly in the US somewhat offset by the pre-commercial launch of roundup ready to yield and the previously announced price increases.

Cotton continues to upgrade to second generation traits mitigated by continued challenges in the total number of acres that are planted in the US and our continued efforts to upgrade the Delta Pines seed business through our breeding focus.

The other major component of gross profit in 2009 is roundup. As we announced last week we expect our roundup business to deliver gross profit of $2.3 billion to $2.4 billion in fiscal year 2009. Pricing, volume and cost of goods sold will all play a role in this growth.

Our branded roundup net selling price is expected to remain above our stated range of $16.00 to $18.00 per gallon with volume growth in the low single-digit range. The combination of expansion of margins in corn and vegetables in 2009 should allow us to see roughly a two point lift in our overall gross margins over the 54% we achieved in 2008.

We expect that we’ll continue to leverage SG&A with a targeted 19% to sales and we are entering a critical period in our R&D spend because of the number of projects entering the final phases of large scale field trials and regulatory reviews.

As a result, we have budgeted R&D in the 9.5% to 10% of sales range. Finally we would expect the tax rate in the range of 30% to 31% for the coming year.

All of this would rollup to a 200 basis point improvement in ROC. From a seasonality perspective as we show on slide eight, we would anticipate a pattern similar to what we’ve experienced in 2008.

The second and third quarters should be our strongest with the second expected to be the most significant quarter for the US corn, seeds and traits business. Given these goals our ability to price to value is a valid concern for our investors.

We are hearing that question on two fronts; one for the seeds and traits business, given the recent volatility in crop prices, and secondly for roundup given the pricing fluctuations from generic competition.

So let me address the seeds and traits question first, while commodity prices for the three big crops are off their [inaudible] year highs, they are roughly double what farmers would have experienced just over two years ago.

Yet even within this positive farm environment the question for any agricultural company is this, does your product pricing follow the cyclicality of commodity prices or do you move independently?

And the answer of course is going to be different by company. For Monsanto, our explicit assumption is that we will not price to the peaks in commodity prices nor will we reduce prices during the valleys.

And that’s how we built our models. There are two aspects of trait pricing models that are relevant. First as we show on slide nine, there are three components of our pricing model; substitution value, the value associated with [in seed] convenience, and the increased yield.

The commodity price environment is a factor in only one of those three, the increased yield and even when we look at yield we take a three year look at commodity prices. So in the past two years our ultimate price list had used commodity prices that have significantly lagged the peak spot prices that we saw in the middle of this year.

Secondly, because we price to value we share that value with farmers. As we create incremental value, a good portion of that value rightfully lands with the farmer. Historically our share of the total value proposition has been in the range of one-third to one-half.

As commodity prices move this value sharing concept reflects a bit of a sliding scale. At higher commodity prices, we share in less of the value and at lower commodity prices our share is greater.

However, at any price level the farmer is getting a significant amount of value. So to put it simply, no matter what the commodity price is, our pricing is designed to ensure that its value and motivation for our farmer to use our seed.

If you look at slide 10 you can see how this sharing orientation proves beneficial in any commodity environment. This tracks the US corn market over the last 25 years. If you look at that period from 1996 to today, average corn yields have increased at a pace of about 2.6 bushels per year creating about 32 bushels of new yield per acre for farmers.

Using a commodity price in the range of $2.00 to $4.00 that’s approximately $60.00 to $125.00 per acre in new value created. Even though seed costs more then it did 15 years ago, a farmer is getting an average return of $1.50 to $3.00 every dollar he’s spending on seed because of the value of this technology.

For more than a year the conversations we’ve had with farmers have been around how we create and share in the values and that’s the perfect foundation for continuing to explain our value in a dynamic commodity price environment going into 2009.

Given our model and our approach I feel comfortable about the price levels for our seeds and traits products for this coming season. Pricing flexibility is also at the heart of the recent concerns we’re hearing about our roundup business. We want to provide you with some overall roundup metrics on slide 11.

To that point we believe the global supply and demand dynamics for Glyphosate in 2009 will be far more critical then the price of any single raw material including phosphorus. Demand is expected to remain strong for this product and our projections always assume additional supply from both China and us.

Even though recent spot prices on Chinese Glyphosate have been fluctuating, they are still at historically high levels. In fact 30% to 40% higher then their historical lows. As we’ve examined this competitive climate and thus our ability to increase our gross profit, we’ve looked at four factors.

First we estimate that raw materials comprise 75% of the cost to produce generic Glyphosate. By our estimates all of these raw material costs are currently 25% to 70% above historical lows.

Secondly until June, 2007 all Glyphosate exported from China was done so free of any export tax. That back credit has been cut by more then half and we see no indication that the government has any plans to change that policy.

Thirdly costs to institute environmental controls in China are on the rise. Current estimates indicate that new manufacturing facilities are incurring 15% higher costs to incorporate environmental controls.

And finally, profit margins remain higher then historical levels as Chinese producers funded by private capital are now focused on earning a return on their investment rather then just selling Glyphosate to generate hard currency.

The price of roundup is contingent upon many factors though and not just the price in China, as we tried to explain further last week, not solely or even predominately on the price of phosphorous.

In short we’re fully aware and have always anticipated that the Chinese manufacturers will bring more supply into the marketplace at a lower price. That lower price however is based on the cost position that is roughly one-third higher and we believe it is a new standard for generic production.

We expect a tough competitive environment in roundup but we are confident that we can maintain and will likely extend our cost advantage as well as drive our leadership position for the branded high quality roundup.

So with that I’d like to turn to the cash flow statement and by inference the balance sheet, not only do I want to address our significant free cash generation but also want to address the question of farmer liquidity and how we’re managing credit in this current environment.

As I mentioned previously earnings should always translate to operating cash and we would expect our operating cash in 2009 to top $3 billion. Offsetting that will be a continued high level of investment in capital spending as we complete our seed manufacturing expansions and our de-bottlenecking project for roundup at our Luling facility.

As a result capital spending will run in the $1 billion range next year. In addition we’d expect to spend some $200 million in technology investments as we extend our collaborations and partnerships and anticipate that our partners will deliver on milestones over the next year that further our pipeline.

Taken as a whole we would expect to generate $1.8 billion in free cash absent any potential acquisitions. This level of cash generation and the health of our balance sheet give us the flexibility to invest for growth while still returning value to share owners through dividends and share repurchases.

As Scarlett’s mentioned already, we’ve now repurchased more than $670 million in shares and should complete our first $800 million authorization ahead of schedule. And as we’ve announced previously once we complete this program, a new $800 million three year plan will automatically go into place.

We are fortunate in that we have the flexibility to use both share repurchases and dividends to return value to share owners and we will continue to do so.

Our guidelines for dividends are driven by the philosophy that we should consistently pay out dividends that reflect our earnings growth. And like everything else we do dividends and share repurchases are our commitments to you.

We’ve maintained a high level of financial discipline around the world and is reflected in our balance sheet and we plan to continue to do so in 2009. We were at a low level of net debt at the end of 2008 fiscal year and will likely cross to zero net debt sometime in the first quarter.

And given the prudent nature of our credit programs, a low level of fixed rate debt and the overall health of our balance sheet we are comfortable that we have the right policies in place to protect and grow our business even through this current credit climate.

The health of the farmer globally and his access to credit is a growing concern given the credit risks that are making headline news today. Structurally as we’ve shown on slide 12 roughly one-third of US farmers get their financing from the Farm Credit System, a government backed lending earmarked specifically for agriculture.

This portion of the credit network for farmers provides a solid anchor that we don’t anticipate changing as a result of the current crisis. Some 40% of farmers tap into regional and community banks for their funding and comments last week by an economist with the Kansas City Federal Reserve Bank noted that small community banks in rural areas in the US generally continue to hold interest rates steady and lines of credit open and are offering new loans.

Additionally the USDA economic research service has indicated that the debt to asset ratio for farmers is at a very low 10% to 12%. But in addition to those comments we’ve also just completed a round of conversations with some of the largest lenders in the agricultural space and there continues to be confidence in the availability of credit for farmers going into the 2009 season.

These lenders are telling us that as a normal course of business they are already renewing and increasing credit lines for their customers so that the purchases for this season can begin.

Fundamentally a farmer on solid financial footing should be able to access any credit they need to run their normal operations.

Outside of the US and the next area we watch is Latin America, particularly Brazil and Argentina. We’re well into the buying season in both places and seed is beginning to go into the ground. In that environment we have not seen any issue of farmers accessing credit for inputs.

Brazil does have a second summer season for corn so while financing looks strong for the first crop we will continue to monitor the situation for the [safrina] season. But more generally speaking the governments in Brazil and Argentina have historically been quick to act to provide liquidity in the agriculture sector so that precedent also contributes to some optimism for the coming season.

Having said that we are obviously watching farmer liquidity closely, but we’re comfortable that our strong balance sheet will serve us well through any softness.

That said we intend to maintain our conservative credit policies globally, in the US we’ll mitigate a great deal of risk in our seed business by collecting a significant level of prepayments which was roughly 70% of our net sales for the business last year, and to the extent that we don’t receive prepayments, we’ll offer terms to strong credit worthy farmers.

On the chemical side of the business we’ve moved to essentially a cash terms model. In Brazil some 55% of our sales were for cash or grain for terms that were securitized with grain and land and in Argentina nearly 75% of our sales were for cash or collateralized with grain contracts.

The credit policies that we’ve put in place over the last six years have led to some of our lowest DSOs in the company occurring in Brazil and Argentina in 2008. Much like roundup you’ll have to separate the noise that you hear about credit for other agricultural inputs from our business.

We are in the business of providing innovation and innovation is valued and thus paid for differently by the farmer then his other purchases. That doesn’t make us immune to the situation but it does make us different.

In summary we completed the 2008 fiscal year ahead of plan both operationally and financially and that’s brought us to our 2009 commitments with confidence that we can deliver another year of exceptional growth based on the value and innovation we deliver to growers around the world.

This value will be reflected across our key financial metrics; the gross profit, earnings per share, and free cash flow and will be done so with prudent management of our balance sheet while aggressively returning value to share owners through our investments and dividends and share repurchases.

We are unique company in the agricultural space and because our success is a direct derivative of our investment in research and of our conversion of technology into practical products that drive yield on the farm. Because we invest for and are driven by innovation we will marry short-term execution with long-term returns.

And our ability to balance both as Hugh will explain shortly, speaks to our performance in 2008 as the platform support the promise and potential of the next four years. So with that I’d like to turn the call over to Hugh to discuss our outlook through 2012.

Hugh Grant

Thanks very much Terry, thank you Scarlett and thanks to everybody on the line this morning. We recognize that this is a difficult period in which to devote an hour of your day to one company, so thank you.

Terry has walked you through our outlook for the coming fiscal year and he’s addressed two of the most pressing macro conditions that will affect our ability to meet our 2009 earnings and our free cash objectives.

My job today is to reach out to 2012, that’s a task that’s somewhat like shouting into a hurricane but I want to do so because just 11 short months ago we laid a five year path to growth. So while we can’t control weather, planted acreage or commodity prices, we do control the factors that truly feed our business wrapped in a climate of long-term global grain demand.

Our ability to do so will be a direct function of our ability to execute, to grow market share, to expand trait penetration and to convert our portfolio to new gain changing platforms.

When we first unveiled our 2012 commitments I thought they were bold. Nearly one year and one economic crisis later, I still they’re bold but I remain confident that we can deliver on our commitments and then some.

So I’d like to walk you through the updates to our 2012 commitments and address the biggest macroeconomic condition that will affect our ability to meet these goals, simply put as the question of the trends and global demand for grain.

Even more with the recent attention on roundup as we look to 2012 growth is a function of seeds and traits. Last November we projected that we’d deliver $6.5 billion to $7 billion in gross profit in 2012 over the 2007 base of $3 billion.

But our original projection assumed no acquisitions and since that time as you know we’ve added De Ruiter vegetable seeds and Cristiani corn and seed [start] portfolio and we’re now developing a new seed treatment platform as well.

So if you please turn to slide 13 the combination of accelerated organic growth and these acquisitions and expansions now lead us to believe that we can deliver gross profit in the range of $7.3 billion to $7.5 billion for seeds and traits in 2012.

This equates to a compound annual growth rate of 18% to 20%. We expect corn and vegetables in this timeframe to each grow at more than 2.5x their 2007 gross profit and our soybean and cotton platforms should nearly double their gross profit contributions from the 2007 base to 2012.

Our plans assumes that roundup fluctuates around $1.9 billion over the next four years to 2012. Without trying to project the peaks and the valleys, simply stated the growth from the acquisitions of De Ruiter and Cristiani from 2008 to 2012 will offset a significant portion of that decline and the remainder will be more then covered by the acceleration of our seeds and traits.

With the sale of our [Bailey] business the remainder of our Ag productivity segment should contribute a steady $300 million in gross profit through this plan. If you take all of this together we’re now committing to lifting gross profit for the entire company to $9.5 billion to $9.75 billion through 2012 or roughly 2.25x our original 2007 base.

Over the next four years we anticipate that margins will continue to expand particularly the seeds and traits contribution. We’ve now established a target of margins of approximately 65% seeds and traits, and a goal of total company margins of 58% to 60%.

If you look now at four years for our business you have to ask if the macro trend of greater grain demand holds true. Today we believe that the simple answer is yes. While its impossible to predict if the trajectory has a five degree slope or a 10 degree slope, all the evidence says that the combination of historically low, even dangerously low ending stocks with continued increased protein consumption will drive the need for more grain and thus more yield.

The best source that I could refer you to is the USDA’s agricultural projections, the 2016 report, the link to which is now posted on our website, here the authors conclude that world consumption of grain, oil seed and meat commodities have exceeded world production in the past several years reducing global stocks.

These tight market conditions are expected to persist for most of the coming decade, specifically the global corn trade is expected to grow about 15% from 92 million metric tons in 2008 to 105 million metric tons in roughly 2017 as you can see in slide 14.

Imports grow more substantially in Mexico and in China. Global soybean trade in the same timeframe grows by some 40% with China consuming 80% of this import growth.

Through this same timeframe the USDA forecasts US corn and soybean acres at roughly 90 and 70 million acres respectively which is similar to our underlying assumptions for 2009 specifically and our assumptions through 2012 generally.

So for those of you who worry about ethanol and I have to confess I am not one you, we believe a change in the ethanol mandate would not have a material effect on planted corn acreage. Most people forget that an acre of corn that goes into ethanol production gives off two value streams; one of ethanol and one of dry grains for animal feed.

So if the United States never produced another gallon of ethanol, we’d still need to feed cattle and those acres that today produce both ethanol and feed would largely revert to being used for animal feed. Thus the total planted acres of corn shouldn’t be adversely affected.

Our commitment to growers in the countries around the world that use our technologies is that we’ll double their yields in corn, soy and cotton by 2030. The facts are clear and compelling given the demand for food, feed and fuel regardless of the trajectory of the curve, we are going to need more yield in every acre.

Of all the tools that a farmer has at his disposal the innovation unlocked from [breeding] and biotechnology has consistently delivered on the promise of more yield for a $1.00 invested. So as we show on slide 15, simply stated, my case to you today is that in a world of increasing uncertainty we at Monsanto believe there is substantial growth still to come.

We’re poised to launch multiple gain changing platforms that will rewrite productivity per acre, extend our competitive position and create a compelling business opportunity for us well into the next decade.

As the financial markets sort themselves out our basic premise will be the same; greater grain demand drives the need for more yield. More yield drives the need for more productivity per acre and more productivity requires innovation and that’s us.

So when a Monsanto sales rep walks up to the farm gate he’s focused on selling value and innovation. He’s having the one conversation about the one agricultural input that matters most to farmers for all time and that’s the seed.

Inside that simple seed is a powerhouse of technology the likes of which farmers have never had access to before and it’s that innovation that will carry the day. So we’ll be there when the farmer plants, we’ll be there when he harvests and we’ll be there when he succeeds.

And with that we are ready for your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Jeffrey Zekauskas – JP Morgan

Jeffrey Zekauskas – JP Morgan

I noticed on your funds flow statement that your deferred revenues are $867 million versus $260 in the year ago period; does that reflect something about your current order book?

Terry Crews

Well actually it’s a positive reflection but its not so much about the US order book, we’re still early on that, what that is is actually prepayments in Brazil, so its part of the reason for our confidence in the start of the Latin America season is based on what we’ve seen there.

As I said, a bit early still for the US order book, but very good news for us.


Your next question comes from the line of Vincent Andrews - Morgan Stanley

Vincent Andrews - Morgan Stanley

About soybeans, previously you talked about at least 5% gross profit growth in soybeans and now you’ve got a $700 million number versus $725 last year, I’m wondering if the reconciliation has something to do with the cost of soybeans.

Terry Crews

I think that the, there’s a couple of factors that went into that. One of those is soybeans ended up higher this year then we anticipated when we talked about a 5% growth because we had some late [inaudible] reporting and that was the reason for the positive fourth quarter soybeans so actually it became not a reduction of our expectation for next year, but just a comparative versus a higher number in 2008.

So I feel it’s still, still equally confident with our soybean business going into 2009.


Your next question comes from the line of Michael Judd - Greenwich Consultants

Michael Judd - Greenwich Consultants

It’s been awhile since we’ve had a strong dollar, I was wondering if you could help us in terms of how we should be thinking about currency impacts related to perhaps Brazil or Argentina.

Terry Crews

I’d begin with a blanket statement that coming into 2009 we anticipated that the dollar would strengthen versus the major currencies where we do business. But those currencies do continue to weaken as we move into 2009 and last year we probably had in effect somewhere in the range of $0.15 from the weaker dollar. Our assumption was some of that would come back in 2009.

I think the good thing for us is the nature of the way we’re doing business in Brazil and Argentina. We’re keeping a much lower risk profile there and that’s the key as we continue to move into the seasons so good start to the first season there, second season we need to stay focused on our credit policies so that we don’t suffer disproportionately as it relates to that currency change.

Let me begin by emphasizing again that we did assume a strengthening dollar in our 2009 guidance.

Hugh Grant

We face Brazil and Argentina at the start of our year so we [inaudible] and we’ll be through that by December, January.


Your next question comes from the line of Frank Mitsch - BB&T Capital Markets

Frank Mitsch - BB&T Capital Markets

I recall I think about three years ago I think you were talking about 2010 and saying that you could pretty much see it from there which is a couple of years ago and lo and behold its, you could really see it from here in the fourth quarter of 2008, and I wanted to follow-up on the soybean question, obviously Terry addressed the outlook for soybeans in 2009 and I was curious as to what your take is today on your outlook for soybean profitability in 2010?

Hugh Grant

We see opportunities in 2010 you’re right, in 2007 I said we could touch 2010 and now we’re planning for 2010 so the seed that we’re producing this year will be the start for roundup ready to yield as a springboard into 2010 so we’re looking at five to six million acres of roundup ready to yield in the 2010 year which is a gigantic start while launching a new technology.

Optimistic, 7% to 11% increase in yield, brand new product, we’ve announced price and there’s price in upside and we’ll share that value with the farmer but I think that roundup ready to yield in 2010 is a game-changer and in the same way that we’ve seen stacking and corn roundup ready to yield provides the opportunity to start that stacking strategy again in beans so nice upside.

I think as we look at 2009, we’re looking through 2009 into 2010 and roundup ready to yield is to beans what our SmartStax launch is to corn and both of those have a trajectory that really start counting in 2010 and 2011.

Terry Crews

Probably the best way to illustrate our confidence in beans is that we would expect by 2012 to have roughly doubled the gross profit from beans that we generated in 2007 so 2009 looks a bit down too because we’ve assumed lower acreage in beans in the US so the combination of those things but we feel very good about soybeans and our ability to move roundup ready to yield to the marketplace.

Hugh Grant

But 2010 is a big year. It’s the transition, it triples on the SmartStax and its when roundup ready to yield really cuts free. We were talking about it from 2007 but 2010 is on top of us now.


Your next question comes from the line of Peter Butler - Glenhill Investors

Peter Butler - Glenhill Investors

You indicated that you expect to be crossing the line into positive territory on your balance sheet with cash so sometime early in 2009, where does that balance sheet go if indeed you hit your earnings targets through 2012? Are you intending to become a bank or are you considering maybe adding some leverage and buying shares and during this period of time between now and 2012 where does your return on capital go also?

Hugh Grant

Generating enormous amounts of cash in the environment we’re in today is a wonderful dilemma. Our use of cash, we’ll continue to look for opportunities that strengthen our expand our seed franchisees and my guess is as you look through 2012 they’ll be increasingly international. So those opportunities continue to exist and you need to be ready for those and I think cash on hand gives you the opportunity to act quickly.

Second one is again talks to the same area and that’s how we strengthen our technologies, either bolster technologies that we have or expand our technology franchisees to investments as well. And then the other two is we’ve always talked about is continuing to bolster our dividends and continuing to be aggressive in share buybacks.

The nice thing about the cash levels that we’re generating is these [aren’t either/ors]. I think that allows you to do all three at the same time.

Terry Crews

The short answer to whether we’re considering becoming a bank is we’re not. I do feel very good though in this environment to be able to say that we’ve got enough of a cash position to finance our working capital through the season and we’re not relying on other means of credit so believe that that’s a good position to be in but fundamentally its not the right place as a company to be holding cash on our balance sheets and we need to continue to look for ways to reinvest cash either into our business or returning it to shareholders to let them make their choices with their own cash.

We’ve indicated already that we’re going to be more aggressive in our share buyback program, that was indicated in our $200 million that we did in the fourth quarter and we continue to buy into the first part of the first quarter as well and I’m very confident we’ll be into our second tranche of share buybacks before we get to the end of the predetermined end of the first share buyback program.

We’ll continue to look at that. Return on capital, obviously we haven’t put a metric out but obviously its going to continue to improve. We had an incredible lift in return on capital this past year, we’re talking about another 200 basis points this coming year and not to talk about old times, but I can remember a time when it was difficult to even discuss return on capital because of the look of our balance sheet.

I’m really pleased with where we’re at now and that’s a number that will continue to rise as well. But we do need to make sure that we’ve got this cash that’s going to be coming our way in the next three years appropriately reinvested or returned back to shareholders.

Peter Butler - Glenhill Investors

Were the results that you got on your test plots on the drought [gene] were they instructive? Did they confirm anything to you? Has the ball moved towards the goal line here?

Hugh Grant

Too early, we’re really in the midst of harvest right now. So I was out last week and enjoyed a break and saw a bit of harvest coming in so we’re physically pulling early plots down now. We’re going to be an awful lot smarter in about six weeks and then we’ll collate that through the fall and we’ll be back with our detailed review in the early days of January when we do our pipeline update. We’re literally crunching our way through those plots right now.


Your next question comes from the line of Robert Koort - Goldman Sachs

Robert Koort - Goldman Sachs

I think in your last press release you talked about undertaking a study of the Glyphosates market globally, are you the only DEA route to roundup or Glyphosate so that the rest of the world is using [glytsene] and is that over time a competitive advantage or a disadvantage and then the growth rate that you show in gallons for 2008 doesn’t look all that exciting, can you give us some sense of what you expect in 2009 and 2010 and then we’ve been hearing from some large sources of generic salt selling at a lower price and I’m curious is that just a flush-out of inventory after this season or do you think there’s something else going on.

Hugh Grant

We have concluded, the product is 35 years old, part of the culture here is continue to kick the tires on roundup but we did a real deep dive in the last six months, so before we dive down into alternate recipes and so on, if you take the high level of roundup let me just give you a couple of snapshots.

By 2012 we lifted our targets and said we’ll out about $1.9 billion of gross profit and in order to land $1.9 billion of gross profit, roundup is going to run in a corridor of about $16.00 to $18.00 a gallon. Last year we were trading above that and as we’re looking at this year, super early days this year, but based on what Terry’s reported from Brazil and Argentina, again this year we’re seeing elevated pricing there and that’s a function of supply and demand and it’s a function of elevated costs in China.

So that’s the headlines and four or five chapters. On DEA versus [glysene], these are two different routes; the [glysene] route is a lot more expensive. China is now using DEA and they’ve been using that for quite some considerable time. I wouldn’t lose too much sleep on that.

Our leverage versus China is four or five points on energy, on environment, treatment of waste, of the [VA key] tariffs have been applied, it gets down to more than a single process of a single raw material. On anemic or less then exciting growth, we’ve always assumed single-digit volume growth and I think when you look at the rate of expansion of roundup ready, single-digit volume growth, I think that’s realistic. Maybe not exciting but we’re going to bring back $2.3 to $2.4 billion of gross profit on a 35 year old product and I think the key for us is giving you the headlines that you can count on as you’re building these models.

Terry Crews

About pricing, at this time of the year there’s always some flushing out of inventory that goes through and the pricing of [glysisates] so we’re not startled by what we’re hearing right now but having said that the supply/demand situation we believe will be solved and that’s why we think that longer term it looks like a $1.9 billion GP instead of the $2, $3 to $2.4 we’ll generate this year.


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

Kevin McCarthy - Banc of America Securities

On slide 12 you’ve outlined in a very helpful way the structure or sources of credit available to US growers, I was wondering if you could comment on the structure of the Ag credit markets in Brazil and Argentina, what you think the implications are for availability of credit there and then with regard to the [safrina] if markets remain dislocated into that, what is your relative exposure there compared to the first growing season?

Terry Crews

We would be less in the summer season, then we are in the current season so one of the things we’re always pleased to get through is the first season in Brazil so it’s less of an impact in the second season for us.

In Brazil the credit structure is a little bit similar to the US structure, there’s government financing that comes from the official bank, the Bank of Brazil, and then there’s subsidized government financing, something we call [inaudible] credit to which we try to avail ourselves to as well. But then when you go beyond that its export lines or companies providing obviously we’re selling a lot of our business in cash as we’ve already indicated by our higher prepay number this year especially with Brazil so for the first season it seems like that financing is available.

For the second season the choices we’ll make is whether we’ll finance the customer through that summer season and our policy in the past and I think we’ll still adhere to that policy and its going to be a tight credit policy because of the exposure may be greater then the opportunity, but its something we have to assess when we get to that season.

I don’t think the current environment is the time to be assessing where we’ll get to there. But I think in general I would say credit available right now and it looks fine for us in this coming season. In Argentina we do most of our business there by cash or grain but actually Argentina appears a bit stronger right now then Brazil, the banking system does, so we’re not seeing the kind of concerns coming into our Argentina business as we might see in the second season in Brazil and again Argentina just cyclically, most of it we get seasonality, most of Argentina we get through in our first quarter and then the next time we really visit Argentina is in the fourth quarter when we begin selling corn seed.

There will be a lot of water to go under the bridge between now and then, but right now both countries look fine for this part of the year and then we’ll reassess the summer season once we get through this season in Brazil.


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

Laurence Alexander - Jefferies & Co.

As your returns on capital increase over the next few years are you also raising your hurdle rates for new investments?

Hugh Grant

Yes we are, absolutely. And as we look at new investments, we’re looking at our existing franchise and making sure that whatever we do doesn’t dilute or impact the growth trends that we’re forecasting so, absolutely.


Your next question comes from the line of Mark Gulley - Soleil - Gulley & Associates

Mark Gulley - Soleil - Gulley & Associates

If you take a look at the roundup, you’ve enjoyed a great win fall with gross profits quadrupling over maybe a three year period to the $2.4 billion, how should we think about how you intend to use that win fall in terms of R&D, in seeds and traits, more crops, more countries, the win fall is great but using it wisely of course is also important as well.

Hugh Grant

I agree, there’s no monopoly on wisdom but I think what we’ve done in the last few years is we’ve demonstrated that. So for me its not theory its practice and the practice is is that if you look our vegetable acquisitions, both Semillas and particularly De Ruiter, you look at Delta Pine Land, you look at Cristiani, these are all investments that the house of roundup has largely paid for and if you think about a trajectory through 2012 as we continue to migrate this business to that seeds and traits platform, I think the wisdom in this business on a year and year, on a season season basis, how do you take cash generated from a 35 year old business, reinvest on new and existing seed platforms that are commanding ever better margins and use that to drive your business forward.

So if past actions are any indication of future performance that’s the path that we’re on.


Your next question comes from the line of Prashant Juvekar - Citigroup

Prashant Juvekar – Citigroup

In Brazil some companies are expecting acreage to be down, especially in northern parts like Marta Grasso, what’s your expectation for planted acres in Brazil this year when you combine summer and safrina season and if you do believe that acres are down, then what do you think will happen to soft commodity prices?

Hugh Grant

We’re not hearing that right now. We’d say, our guess would be probably flat to marginally up but we haven’t heard down. Argentina is a different story because they’ve had very, very dry conditions there so it’s not an economic trend and probably the contrary at the moment, lousy planting conditions as they run up to that season.

Terry Crews

The only conversations that we’ve had is probably what, other then what Hugh mentioned on corn in Argentina is where corn in Brazil might go and there could be a little bit of softness of corn in Brazil so I’m really pleased to know that we’re already sold out of our new YieldGard trait there so feel good about that and the rest of the market, it probably isn’t so much to us whether its up or down a million acres or two.

Prashant Juvekar – Citigroup

Do you believe the marginal acres in northern area if commodity prices come down will continue to plant?

Terry Crews

I can’t really project where those acres would go but even if you’re talking about $9.00 soybeans compared to where it was a few years ago when they were still planting about those many acres, so its still at least $3.00 above where they were when they planted this kind of acreage in the past. I don’t know, we don’t project commodity prices or acres but just conventional wisdom would say there’s still a lot of value there for them to plant.

Hugh Grant

I think the first determinant in this is that do you get rainfall? Are the conditions good for planting? Rainfall is about as easy to predict as commodity prices. Once you go over that first hurdle particularly given where bean prices are versus historical levels my guess is they’ll go ahead and put seed in the ground.


Your final question comes from the line of Donald Carson - Merrill Lynch

Donald Carson - Merrill Lynch

In addition to grain prices coming down in general we’ve seen quite a shift in corn versus soy and the advantage for the US grower of planting of corn has pretty much evaporated, historically you’ve been somewhat indifferent between whether a farmer here plants corn or soy, how does that unfold over the next few years as you launch roundup ready to yield this year and SmartStax in 2010? Are you still relatively indifferent or do you become more focused on corn?

Hugh Grant

Still relatively indifferent, probably a slight edge on corn but I think your assumption that the golden days of corn are over for American farmers, I’m not sure I would agree with that so to the very first line of questions that we started this call with here’s how I would look at it.

As you look at 2009 through 2010 and you think of the continued uptick in yields and then the extra bump that we get with SmartStax for the change in refuge and better buck control, I think the key in this rather then getting too [inaudible] in the arbitrage between corn and beans, I think the investment hypothesis going forward is whoever drives yield wins. And as the farmer looks at the trade off between corn and beans on fixed acres, the real pinch point of this is, how do you drive yields on fixed acres.

I’m less worried about the corn soy trade off. I think it’s a big deal for fertilizer companies, less for us. I think the real drive for us is global demand and as people, I don’t think that that’s going to go backwards and I think despite all this people are going to continue to eat and that’s what will drive the corn not as much acreage as the demand for yield on an acre going forward and that’s where we’ll win or lose.

Thank you to all of you for staying with us this morning. For those of you that own our stock I’d like to thank you for your investment and your continued confidence in us. It’s not easy to take an hour out of your day in a time of such uncertainty.

Let me tell you how we’re thinking about it here and how I think of this personally, my touchstone in all of this and I hope that its yours as the farmer, I’ll leave it to the government agencies to track these things often retrospectively to worry about whether soybeans are 70 million acres or 69 or where corn is going to end up.

And I’ll leave it to much smarter people then me to speculate whether corn is $4.00 or $4.50. What I’ll obsess about and what our team obsesses about here is the farmer and how we deliver value to him year in and year out because its value that’s rewarded when he chooses his seed every spring.

My job and the job of my team here is in turn to share that value with you. So I think if your touchstone is the farmer then at times like this it kind of helps from time to time to put on a pair of boots and go and ride in a combine and that’s what I did and I saw 170 bushels DeKalb triple-stack corn being harvested with yields in fields that have never delivered over 150 bushels before.

And I think if we can do that year after year, farm after farm, country after country, around the world, we’ll meet our commitments to more then double gross profit in 2012 and we’ll meet our commitments to double yields by 2030.

So thank you again to all of you for joining us today and we hope only the best for you and your families in this time of great uncertainty.

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