Monsanto's (MON) CEO Hugh Grant on Q2 2016 Results - Earnings Call Transcript

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Monsanto Company (NYSE:MON) Q2 2016 Earnings Conference Call April 6, 2016 9:30 AM ET

Executives

Laura Meyer – Head-Investor Relations

Hugh Grant – Chairman and Chief Executive Officer

Brett Begemann – President and Chief Operating Officer

Pierre Courduroux – Chief Financial Officer and Senior Vice President

Analysts

Don Carson – Susquehanna Financial

Vincent Andrews – Morgan Stanley

Juvekar – Citigroup

Chris Parkinson – Credit Suisse

Bob Koort – Goldman Sachs

Jeff Zekauskas – JPMorgan

Steve Byrne – Bank of America

David Begleiter – Deutsche Bank

John Roberts – UBS

Sandy Klugman – Vertical Research

Operator

Greetings. Welcome to the Monsanto Second Quarter Fiscal Year 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Laura Meyer, Investor Relations Lead for Monsanto. Ms. Meyer, you may begin.

Laura Meyer

Thank you, Rob, and good morning to everyone. I am joined this morning by Hugh Grant, our Chairman and CEO; Brett Begemann, our President and Chief Operating Officer; and by Pierre Courduroux, our CFO. Also joining me from the IR team are Tim Boeker, Priyal Patel and Ashley Wissmann.

Our second quarter call marks the midpoint of the critical northern hemisphere Ag season, and today we will provide a summary of our second quarter results as well as our views into our outlook for the rest of the year. This call is being webcast and you can access the webcast, supporting slides and the replay at monsanto.com.

We've provided you today with EPS and other measures on both a GAAP and ongoing business basis. Where we refer to non-GAAP financial measures, we reconcile to the nearest GAAP measure in the slides and in the press release, both of which are on the website.

This call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risks and uncertainty, the company's actual performance and results may differ materially from those expressed or implied in any forward-looking statements. A description of the factors that may cause such a variance is included in our most recent 10-Q and in today's press release. The forward-looking statements are current only as of the date of this call and the company disclaims any obligation to update them or the factors that may affect actual results.

First, let me review our second quarter results as shown on slide four and five. We delivered ongoing earnings per share of $2.42 within our guidance range for the quarter. When compared to the prior year, our ongoing earnings per share is close to flat when measured on a currency neutral basis. On an as-reported basis, our second quarter earnings per share is $2.41, reflecting $0.01 for restructuring charges, environmental and litigation matters and income from discontinued operations. Finally, our free cash flow for the first half of our fiscal year was $906 million as compared to $986 million in the prior year.

With that brief summary, let me hand it to Hugh to provide the strategic outlook.

Hugh Grant

Thank you, Laura, and good morning to all of you. Just a month ago, Pierre shared our revised outlook for our business, reflecting the challenging times for this industry and how the micro trends that we've been highlighting have continued to soften. With our near-term outlook remaining relatively consistent and recent consolidation events, I'd like to use my time with you today to share our longer-term outlook and provide a quick update on our strategy.

There are really three key variables to anchor our strategy and our optimism for the opportunity to grow our business in fiscal year 2017 and beyond, as outlined in slide six. First, demand growth for our key crops continues to be strong, and the need to help farmers meet that demand through sustainable yield solutions remains a global priority. With these demand trends in our portfolio, we remain bullish in agriculture and our position as the industry leader.

Second, innovation has been and is expected to remain the critical differentiator in unlocking incremental yield from existing acres. And we remain the undisputed industry leader in biotech, breeding, biologicals and now in digital Ag solutions. This innovation, as evidenced by the industry's broadest, deepest and most proven pipeline drives our strong standalone growth plan. Not only does this give us the confidence that from the midpoint of our current year guidance we can deliver a baseline CAGR in the mid-teens for ongoing EPS for the next three years, but it fuels our belief that we can continue to be the innovation engine for the industry, making us the partner of choice in leading Ag technologies.

And this brings us squarely to our third point. We believe the industry will continue to rationalize, focusing investment to the highest return options. We now see this translating into further R&D or commercial partnerships for which we're uniquely positioned to participate and no longer see large-scale M&A as a likely opportunity.

Let me be clear. Our strategy is not and was not dependent on large-scale M&A. Rather, our strategy is innovation-driven and it's highly collaborative. And our vision for fully integrated solutions for the farmer of the future requires that strategic approach. These solutions encompass seeds, crop protection and nutrition management as outlined in slide seven. Importantly, digital agriculture is expected to become the standard for growers, large and small, who will need to manage each input precisely and responsibly.

Let's take a quick look at the innovation platform advantages that make us the best positioned to execute in this strategy and unlock the next layers of yield potential. Through our breeding and biotech platforms, we've built an outstanding foundation in seeds and seed-related technology. Today our seed trait footprint reaches approximately 400 million acres in our core crops, underpinned by our unique germplasm libraries, global branded seed share and industry-leading biotech trait position.

Within this footprint, we're the world's largest seller of seed treatments with our own Acceleron brand of Seed Applied Solutions, now reaching more than 75 million acres, while our extensive use of markers allows us to protect the seed from many diseases through breeding traits. Further, we're enhancing these Seed Applied Solutions with microbial treatments developed through our BioAg Alliance with Novozymes, and with our plans for our Phase 4 nematicide, Nemastrike, which has a potential net present value now estimated at $1 billion.

Moving to our weed control platform through the combination of our proficiency in biotech and chemistry, we've long been the leaders in these systems with our Roundup Ready traits and our strong position in Roundup, the world's most widely-used herbicide. We're again on the verge of upgrading the industry's largest trait platform with our Roundup Ready Xtend Crop System across multiple crops.

This includes plans to invest in dicamba production capacity and broad sourcing agreements for a molecule that we expect to become the world's second most widely-used herbicide. And beyond this, we have third and fourth generation weed control platforms in the pipeline to upgrade yet again.

We've also transformed insect control through our biotech leadership in corn, soybeans and cotton as evidenced by our broadly-penetrated insect control traits including SmartStax corn, Bollgard II cotton, and Intacta soybeans with next-generation replacements already in Phase 4 in the pipeline. Further, with lygus control in cotton, we're targeting to deliver the first biotech solution for piercing, sucking insects that cause nearly $200 million of annual losses in U.S. cotton alone. Beyond these biotech solutions are the BioDirect RNAi technologies for future differentiated approaches to insect control.

Finally, with our climate digital Ag platform, we have the ability to integrate solutions for growers through the application of industry-leading capabilities in data science and software engineering. This year, our field health and nitrogen advisors will be available across 120 million acres in corn and soybeans in the U.S. And through our agreements with the leading farm equipment manufacturers and Ag retailers, we have the unique ability to drive on-farm connectivity and adoption onto our FieldView platform. This will become the integrator of technologies, literally row-by-row and acre-by-acre.

To further develop these platforms, particularly in the area of crop protection solutions, we'll focus on a collaboration model that enhances our existing R&D and commercial base through licensing, partnerships, collaborations and smaller-scale M&A as shown on slide eight. Our emphasis is on developing proprietary synergistic solutions to address unmet needs or upgrade current solutions to unlock further yield. This is about trading new value or displacing existing value in the current $57 billion global crop protection input space. And our leading seed footprint and field testing network combined with our extensive genomics knowledge gives us a unique advantage in attracting partners.

So how does this look in practice? These partnerships and collaborations could range from those included in our Roundup Ready PLUS program that currently reaches 50 million acres in North America to opportunities in seed treatments and in digital Ag.

Our R&D investment considers the development of new molecules through the same collaborative approach, paired with discovery programs that leverage our genomics knowledge, similar to the science used to develop Nemastrike nematicide in just five short years. This unique approach also includes our fungicide development collaboration with Nimbus Therapeutics and our next-generation herbicide columns trait development program.

Smaller-scale M&A remains an opportunistic tool to create additional layers of growth in crop protection solutions, and we will continue to take a disciplined approach, seeking strong strategic fit and synergistic value. With our pace and breadth of proven innovation developed both internally and through broad scale partnerships and collaborations, we expect to continue to lead and define integrated solutions for the industry. And importantly, despite near-term headwinds, we remain confident in the foundation and in the milestones that we continue to deliver to make that vision a reality.

So with that, Brett's going to highlight the progress toward these milestones. Brett?

Brett Begemann

Thanks, Hugh, and good morning to everyone on the line. Despite the continuation of near-term currency and commodity price headwinds, we continued to deliver on key milestones that set up our next-generation platforms across weed, insect, disease and nutrition management. Today I'd like to share those milestones, what are we seeing on the ground, and why we have the confidence in our innovation-based growth drivers.

Let's begin with our largest and most durable platform, our global corn business. Globally, in a market challenged with extreme currency headwinds, we expect our full year gross profit to be down low- to mid-single digits as a percent, with currency being the single largest driver of the decline year-over-year.

We continue to expect full year corn germplasm price mix lift in local currency to be flat even after competitive discounts, and we expect the increases in volumes from share gains in the upcoming season in the southern hemisphere to potentially more than offset the incremental corn cost of goods resulting from our lowered seed production plans.

Let's take a look at some of the regional highlights as shown on slide nine. In the U.S. on a growing acreage base, our Year 1 to 3 hybrids are tracking to 50% to 60% of the portfolio and SmartStax remains roughly at the same percentage of the portfolio as last year. Our disciplined response to our competitors' action has been effective as we expect to hold or grow our leading share position while maintaining the premium pricing our yield advantage garners.

Further, we are planning for our new disease shield hybrids for the U.S. market. These products offering a combination of genetics with disease resistance are made possible only through our extensive investment in marker technology. They are expected to be available for the 2017 season and will be the latest solution to help farmers with industry-leading comprehensive protection against major corn diseases.

In Brazil, we demonstrated discipline to offset some of the currency weakness with 20% plus germplasm price increases in local currency expected for the full year. We grew share in the first season of the year and our VT Triple PRO product is the first to offer below-ground insect protection in the country with strong conversion to the new trait platform.

In Argentina, our share remains well above 50% in a region where acres have estimated to have declined 15% to 20% versus prior year. With our strong portfolio and share position, we are well-positioned to participate in the expected growth in the area planted in the upcoming season. With the reduction in grain export taxes and the devaluation of the peso, we continue to be optimistic about the future prospects for agriculture in Argentina. Finally, across Europe and Africa, we also expect to hold or grow share in a region of declining corn acres.

Outside of these commercial milestones in global corn, we are commencing with our seed production plans for next year and expect to increase the scale from the current year, which should reduce a significant portion of the corn COGS headwinds for the next fiscal year. This creates a strong foundation from which we can continue to launch our new hybrids, as well as seven different late-stage technologies that have licensing and launch opportunities in the near future.

Let's shift to soybeans, and specifically to Intacta, where we've had an outstanding year achieving 35 million acres of penetration across South America as shown on slide 10. This is more than twice our fiscal year 2015 penetration, which is a tremendous accomplishment in our third year of launch. We currently expect to reach 75 million acres by 2019 and ultimately expect the multi-generations for insect-protected soybean technology to fully penetrate the 100-million acre opportunity in South America. The trait is offered in varieties with a fit across all of Brazil, and we've expanded our seed production for 2017, increasing to greater than 70 products for Argentina.

Our other blockbuster soybean growth driver is Roundup Ready 2 Xtend soybeans, as shown on slide 11. As you know, we received our China import approval back in early February and now are very pleased to see the recent opening of the EPA comment period for the in-crop use of M1691, a low-volatility dicamba formulation. This marks a critical step forward for the Roundup Ready 2 Xtend crop system. According to the EPA, this first label for in-crop use is expected by late summer to early fall, and we expect approval for the in-crop use of XtendiMax and Roundup Xtend, both with VaporGrip technology, shortly thereafter to be ready for the fiscal year 2017 season.

We still await final EU approval of the stack product and continue to be frustrated by the unexpected administrative delays after receiving the European Food Safety Authority's positive opinion last June. The demand for the technology is strong, and we continue to be positioned to provide our new Roundup Ready 2 Xtend varieties for 3 million acres this year, but we are at a point where every day counts to be able to provide that experience to our growers.

Not to be outdone, Bollgard II XtendFlex cotton is now expected to penetrate more than 2 million acres in the U.S., as shown on slide 12. And we anticipate that these new varieties will drive continued share gains on the order of three or more points, further proving the pent-up demand from farmers for our new varieties.

Not only are we progressing with the key milestones for these two products in the Roundup Ready Xtend system, but we are moving forward and planning our potential investment in dicamba capacity, as shown on slide 13. The Roundup Ready Xtend crop system will enable the upgrade of the industry's largest seed technology platform, and this investment will allow us to more fully participate in the value we create through integrated solutions.

To ensure there is sufficient supply of the expected 250 million acres of opportunity in the next decade, we continue to plan for the dicamba manufacturing investment to provide cost-effective, timely dicamba to our growers. This capital investment is expected to be in the range of $900 million to $1 billion over the course of three years. Once complete, we expect it would supply 25% to 35% of the fully mature demand and provide a return on investment in the mid-teens from incremental dicamba sales alone, accelerating to 30% when considering the total system benefits of having our own capacity and relevance in pricing.

We expect economies of scale with proximity to the Luling plant, logistical advantages with convenient access to the Americas and a strong formulation pipeline to deliver crop safety and convenience to our growers. We also continue to balance this planned investment with supply agreements across a diversified set of producers, which has already led to some additional planned capacity. We simply are the best positioned to prime the supply pump that will be needed to fuel this blockbuster weed control system upgrade, while further strengthening our integrated solutions platform.

Before we leave our core business outlook, I wanted to highlight that we are disappointed by the recent cotton seed price control order notification in India. We, together with our partner, Mahyco, continue to challenge elements of the attempt to fix cotton trait fees and licensing terms before the High Court of Delhi and remain confident in the merits of our legal claims. While the potential impact to us is in the tens of millions of dollars, the real loss is the loss of access to new technologies for the growers in India.

Beyond the core business drivers, I'd like to provide a brief update on our transformation status, as outlined on slide 14. We continue to focus on scale and efficiency, while still delivering outstanding innovation and customer service through the creation of our four commercial hubs and our R&D center of excellence in St. Louis, as well as by leveraging the power in data analytics. Our continued progress with our planning and execution of our actions is further confirmation of our confidence in delivering $500 million of cost savings by fiscal year 2018 and in our ability to transform our way of working.

Moving to our new platforms. We continue to progress toward our key milestones in climate, as shown on slide 15. We are working toward closing our most recent agreement with John Deere still expected this fiscal year. This agreement marks our third connectivity agreement with a major equipment manufacturer, following agreements with AGCO and CNH and is a great addition to our industry-leading retail network through the top six U.S. Ag retailers.

We also recently announced connectivity agreements with several agronomic and retailer software systems as well as the John Deere Operations Center, connecting our Climate FieldView platform to the farm management systems of more than 80% of the top retailers across the Corn Belt and the largest U.S. Ag equipment provider.

This reach and level of connectivity, combined with the capabilities of our advisors and the adoption we have secured to-date, establishes Climate as the leading digital Ag platform. We expect to continue that momentum in fiscal year 2016, where we have expanded our PRO availability by more than 50% from 2015 to 120 million acres across corn and soybeans in the heart of the Midwest. With this expansion, we are making nice progress towards our targeted penetration of 12 million paid acres and platform adoption to an expected 90 million acres.

Moving beyond the U.S., we are now expanding our in-field beta testing plans for 2017 in Brazil and now expect our first product launch in two years. As I tie all of these milestones together, it comes together quite simply. We now have the latest set of innovative agronomic tools that deliver yield along with weed, insect, disease and fertility management and we expect the deliverables from this year to create momentum to continue to build our industry-leading platforms and integrated solutions vision. There is no doubt that fiscal year 2016 is challenging, but we still – we will emerge as a leaner and stronger organization with our best corn hybrids, our new Roundup Ready Xtend system and Intacta soybeans, all poised to deliver strong growth in fiscal year 2017 and beyond.

With that, let me pass it to Pierre for the financial outlook.

Pierre Courduroux

Thanks, Brett, and good morning to everyone. Not only do we continue to focus on delivering on the operational milestones Brett shared with you, but we remain focused on our financial pillars, return on innovation, financial discipline and balanced capital allocation. Together, these factors should position us well to deliver on our long-term integrated solutions growth strategy. But first, let's focus on the second quarter.

We delivered ongoing earnings per share of $2.42, in line with our guidance. And when setting aside significant currency headwinds, particularly, the devaluation of the Argentine peso, it's essentially in line with the prior year. On this currency neutral basis, the negative impact from glyphosate declines increased discounting in the U.S. in corn and soybeans, lower soybean volumes and higher corn cost of goods were offset by the benefits from our reducing accounts, Brazil corn pricing, increased Intacta penetration and reduced operating expenses.

From a GP margin perspective, in the second quarter, our Seeds and Genomics gross profit as a percent of net sales held flat at 64%. Global corn gross profit margins were flat as increased cost of goods from lower production plants combined with tactical discounting to counter competitive offers offset the mixed leaf benefits from new hybrid introduction and the price increases in local currencies in Brazil.

In global soybeans, gross profit margins declined slightly as a result of Roundup Ready Xtend launch costs and the discounting in the U.S., which more than offset the benefit from increased Intacta penetration. Vegetable margins improved due to lower costs arising from improved operation. And finally, Ag productivity gross profit margins declined due to lower Roundup pricing.

As we look to the full year, we continue to expect $4.40 to $5.10 of ongoing earnings per share as shown on slide 16, which still assumes $0.90 to $1 of currency headwinds. On an as reported basis, our estimates for earnings per share have improved to $3.72 to $4.48, primarily due to a change in the expected timing for the accounting of restructuring expenses.

Let's look at the specific components of our outlook. First, we continue to target Seeds and Genomics gross profit that is relatively flat, meaning plus or minus 2% to 3% for the full year. Exclusive of estimated currency headwinds of roughly $400 million. Seeds and Genomics gross profit is estimated to be up single-digits, driven primarily by the expected increase in licensing deals, increasing Intacta penetration and global corn footprint expansion. We expect more than $300 million to as much as $450 million of benefits from licensing deal in fiscal year 2016, mostly within these segments.

Our Ag Productivity gross profit outlook is still expected to be roughly at the midpoint of our range of $900 million to $1.1 billion. We expect to recover some of the volume declines from the first half of the fiscal year, as we continue to shift to a higher ratio of branded volumes. We could see a full year volume somewhat softer than our roughly 300 million gallons of capacity, but we are not expecting material volume variance at this point.

From an operating expense perspective, we remain on track to deliver $165 million to $210 million in savings from our restructuring actions in fiscal year 2016. These savings, together with spending discipline and currency benefits, contribute to our expectation that operating expense will be down slightly for the year, inclusive of increased investments in new platform. Assuming the Argentine peso exchange rates remain close to a ratio of 1:15 at the close of the fiscal year, we still expect other expense net to increase year-over-year by approximately $180 million.

The other key currency assumption underpinning our outlook assumes the Brazilian real at a ratio of close to 1:4. Taxes continue to trend lower, potentially now even below the low end of our range of 25% to 27%. Beyond those profit drivers, the net effect of the benefit from our share repurchases, including net financing expense, should generate a net earnings per share benefit of $0.24 to $0.27 with 437 million shares outstanding at the close of our second quarter.

We expect to continue to convert our earnings into cash for disciplined management of working capital and expect free cash flow for the year to be in the range of $1.4 billion to $1.6 billion with investing cash outflows now expected to be in the range of $800 million to $1 billion.

With that, let's move to how we've deployed cash and our plans for the future, as shown on slide 17. We just closed out our $3 billion in ASR in the second quarter. And since announcing our capital allocation strategy in June of 2014, we have successfully deployed more than $13 billion with more than $11 billion returned to our owners through share repurchases and dividends.

Given the seasonality of our business, we expect our net debt to ongoing EBITDA ratio to peak at the end of the third quarter and end the fiscal year somewhere between a long-term target of 1.5 and the ratio of 2.0 we see at the end of the second quarter. This capital structure continues to provide the necessary financial flexibility to pursue organic and external growth opportunities while still returning excess capital to our shareowners.

Looking ahead to fiscal year 2017, we see the opportunity for strong growth in ongoing earnings per share, as shown on slide 18. Assuming stable currencies, this expected growth is driven by our soybean innovation growth drivers, the durability of our global corn platform, continued financial discipline and improved cost of goods outlook for corn and soybeans.

Our soybean innovation drivers are expected to continue record-setting adoption rates on the ramp to the target opportunity with both Intacta and Roundup Ready Xtend soybeans anticipated to make a meaningful step up next year. By 2019, we expect 2/3 of the U.S. acres to be penetrated by Roundup Ready Xtend soybeans and approximately 75 million acres across South America to be penetrated by Intacta. In addition, we expect the roughly $70 million to $80 million of Xtend launch costs to decrease significantly next fiscal year, reducing to a very low amount by the third year of commercialization.

From a global corn perspective, it's still too early to estimate specific pricing and volume dynamics, but we do expect to see benefits from the launch of new hybrids globally from expected double-digit price increases in local currency for Brazil and Argentina and from higher seed production plans.

We have just completed those plans for the northern hemisphere and already expect to see a significant improvement next year that will affect part of the $90 million to $100 million of corn COGs headwinds we anticipate for this year. We will provide an updated estimate after we lock in production for the southern hemisphere and after we see our final production yields in the northern hemisphere.

Currency is assumed to be relatively stable to today's assumption, which translates to an estimated $180 million reduction of our expenses due to the absence of the significant Argentine peso devaluation.

On the financial discipline front, we continue to track towards the expected $375 million to $420 million of savings in fiscal year 2017 from our restructuring and cost savings initiatives. This would represent an increase of nearly $200 million in savings compared to this year's target. These anticipated savings represent only one element of the projected total spend for next year, as items such as inflation, new investments, commissions and incentives are still to be estimated, but it certainly indicates great progress towards our targeted $500 million of savings by fiscal year 2018.

Finally, while we still expect to see licensing opportunities in fiscal year 2017, it is too early to estimate their impact, but it could be lower than this year as we expect a higher than typical contribution in 2016.

This growth opportunity extends beyond fiscal year 2017, as we continue to target baseline mid-teens compounded annual growth rate for ongoing EPS from the midpoint of the fiscal year 2016 guidance to fiscal year 2019. This baseline projection, while likely not linear, is built upon continued momentum from the corn and soybean growth drivers we just outlined, continued benefits from financial discipline in our capital allocation strategy, the assumption that Ag Productivity gross profit will remain in today's expected range and, importantly, an outlook for currency and commodity price that anticipates little to no change from today's assumption.

That being said, any appreciable improvement in these variables could accelerate us back to our earlier track of greater than 20% compounded annual growth rate in this timeframe. However, as CFO, I continue to believe it is more prudent to wait for the evolution of the [indiscernible] crop season to reassess.

My focus remains unchanged: return on innovation, financial discipline and balanced capital allocation. These, together with a sound and disciplined approach to delivering on our integrated solution strategy, support long-term growth, expanding industry-leading EBITDA margins and return of value to our shareowners. Continuing to execute well on these pillars, along with delivering on the innovation in our pipeline, provides a gateway to rapid future business growth.

Thank you for your time today. I'll now turn it back to Laura for the Q&A.

Laura Meyer

Thanks, Pierre. With that, we'd like to now open the call for questions. As we typically do, I'll ask that you please hold your questions to one per person so that we can take questions from as many people as possible. You're always welcome to rejoin the queue for a follow-up.

Rob, I think we're ready to take questions from the line.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today comes from the line of Don Carson with Susquehanna Financial. Please go ahead with your question.

Don Carson

Yes. Thank you. A question on your mid-teens earnings growth outlook. Pierre, you commented that you're not expecting any benefit from FX other than no Argentine write-down. But what about the – your commodity outlook? I know, previously, you had expected some help about 20% of your gross profit growth to come from an improved corn outlook.

Are you more bearish on the corn outlook now and – because of the higher planned acreage? And you didn't comment at all on what could the volume opportunity this year if growers in fact do meet the USDA expectations on acreage.

Hugh Grant

Yeah. Don, thanks for your question. I'm going to ask Pierre to do a lot of the color around that. I would say the recent projection is a bit more optimistic than perhaps we would – I think as consistently optimistic, this first blush one so our guess is there's a nine in front of the acreage projections, but it's probably a couple of million acres bolder then we would have thought at this time. So, it's a bit stronger than we would have expected. But, Pierre, given the optimism with that caveat, maybe just a bit color.

Pierre Courduroux

So, Don, maybe the point we made today and at the conference a month ago was, I mean, based on what we are seeing today and the fact that we were anticipating a rebound that we've not seen, we wanted to be more prudent in our assessment of the market. And basically, on an as-is basis, this is what we think our company can deliver. Now, if conditions change and improve, definitely, we will revisit our plans. But on an as-is basis, the projections we gave is really what we think we can deliver.

Don Carson

So, any improvement in currency and corn price would be upside to your mid-teens growth outlook?

Pierre Courduroux

Potentially.

Don Carson

Yeah. Great. Okay. Thank you.

Pierre Courduroux

Yeah. Thank you.

Operator

Our next question is from the line of Vincent Andrews with Morgan Stanley. Please proceed.

Vincent Andrews

Thank you, and good morning, everyone. Just a question on – if we're going to stay in the same commodity price environment this year and the currency is going to stay flat, the seed discounting issues that have cropped up this year in both corn and soy following multiple years of not seeing it having low commodity prices, why will those get better next year?

Brett Begemann

Well, good morning, Vincent. This is Brett. I think, sitting here today, trying to project what next year's environment's going to look like is difficult, but here's how I think about it. To your point, we've made it through about three years or so without these kinds of shenanigans...

Hugh Grant

Probably more.

Brett Begemann

And then, we turned around and here comes this year and we see it. And at the end of the day, like we suggested in January, there'll be no winners. There'll just be losers. So, I think with that lesson, as I look towards next year, I think the discipline will come back into the marketplace because it just doesn't help anybody. It just hurts. So, I think we'll go back to the way we were performing in the market as an industry before this year.

Pierre Courduroux

And, Vincent, I think an important point, too, is entering into next season, we will enter the season in pricing the way we've entered the previous seasons, so basically pricing to the value and the incremental yields we are bringing to the market, and that's really been our approach. At the same time, as Brett was saying, I mean, we're not going lose share. But our intention, getting into next season, is definitely to continue pricing to the value we are bringing to the farmers.

Vincent Andrews

Yeah, and that's a good point. If I could just sneak in a follow-up on the tax rate, you're going to go below 25% this year, which is the lowest rate in a long time. Is there going to be a tax rate headwind next year? Do you think you can stay around 25% next year?

Pierre Courduroux

So, that's one of the elements, Vincent, which is too early to estimate at this point in time. I mean, we got some tax planning opportunities. But this year, we'll – as we mentioned, we'll be potentially lower than our 25% to 27% guidance in terms of effective tax rate. So, this year is particularly beneficial. We'll have to reassess where we are starting into next year. So, that's one of the exercise we need to conduct in the coming months.

Vincent Andrews

Thanks very much.

Pierre Courduroux

Thank you.

Operator

Our next question is from the line of P J Juvekar with Citigroup. Please go ahead with your question.

P J Juvekar

Yes. Hi. Good morning.

Hugh Grant

Good morning.

P J Juvekar

You talked about getting into Ag chemicals for the last couple of years. You made a big [indiscernible] agenda last year. And there, you seem to indicate that you're taking a different track by focusing on small M&A. So, I guess, the question is, are you not interested in any large M&A or a large joint venture?

Hugh Grant

Yeah. I – so, thanks for the question, P.J. I think what hasn't changed throughout this time is we still believe there's an opportunity for the integrated solutions. We still think there is an opportunity in bringing chemistry and biology together on that acre and using data science as the glue that holds that together. So, that's been unwavering. We continue – in fact, I'd say, the more we see the more we believe that that's an opportunity.

And when you look at how growers are challenged at the moment, they are desperate for those kind of solutions. I'd say we also believe that we got strong independent strategy. So, it's tough in Ag at the moment. But even in these tough times, growers are reaching for the best technology that they can possibly find.

So, I think we're really clear on this. We saw an opportunity with Syngenta and that opportunity was to accelerate that process, but it was never contingent or dependent on it. So, we – Syngenta is gone. We will not and we would not have done an overpriced deal. So, I think, now, we are looking at how we get to the same destination, but using a different path. And I think the way of getting there is going to be driven more on a product-by-product basis. It's going to be driven by collaboration, bringing other people's chemistry up on that acre. And I think it's going be driven by some of the work that we underscored this morning like the new nematicide from Nemastrike and frankly some of the new smaller companies out there like Nimbus Therapeutics.

So, we're not anchored on the methodology, but I do think we're anchored on the opportunity set. And the reality today is I think we're better placed than our competitors to integrate those three pieces together because our belief in this is data science is going to be the anchor that pulls them together.

So, this hasn't been a cost synergy or tax play. This has been about growth and creating new value and developing new insights for the grower. So, that's why I made the comments this morning. We need to get real. The landscape has shifted, and we need to focus on driving that integration by other means.

P J Juvekar

Thank you for that. And, Pierre, a quick question on your expected licensing income of $300 million to $450 million this year. Can you give us a bit more clarity on that? What is the timing of that if you realize it at the end of first half and which products? Thank you.

Pierre Courduroux

So, obviously, P.J., I mean, we're not going to disclose the exact nature of those agreements at this time. But I mean, compared to where we were a quarter ago, we actually have better visibility and we feel we are in a really good position to close several deals, actually, before the end of the fiscal year. The exact timing of those will depend on, obviously, the final negotiations. But we feel we are in a really good place right now with these $300 million to $450 million of benefits that we are – we talked about today.

P J Juvekar

No, I agree. Good progress. Nice focus. It's coming along well.

Pierre Courduroux

Thank you.

P J Juvekar

Thank you.

Operator

Our next question is from Chris Parkinson with Credit Suisse. Please go ahead with your question.

Chris Parkinson

Perfect. Thank you. You mentioned you're still awaiting the final EU approval for Xtend, which experienced some unexpected delays after the opinion last June. Can you just comment on whether or not this is a reversal or a simple muting of a positive opinion? And then, also, just any scenarios on how this affects your launch or even the future monetization of the product? So, any color there would be appreciated. Thank you.

Hugh Grant

Chris, thanks for the question. So, if you – because this tends to get a little bit confusing, so let me just do the high-speed recap. So, EFSA, the European Food Standards Agency, green lighted the approval last June, which is what you referred to. And ordinarily, it would be months – for that administrative process to follow on behind that would normally be months. We're sitting here in the spring of a new year still waiting, so an unusually slow delay even for Europe and very frustrating.

The good news is we got the green light for Chinese import approvals in February, and then that was compounded last week, I guess, by the beginning of the consultation period here in the U.S. for the first formulation.

So, the last, last piece in this is the administrative sign-off through the EU. All the science was done. All the heavy lifting was done. So, it's that rubber stamp, but frustrating. And we're at a point now where days count. And so, the spring is – it looks like, while the spring is setting up dry in a lot of places, it's got the potential of stretching out but we've got retailing growers desperately hoping that they get a chance to take a sneak peek at this technology and frustrated by European bureaucrats.

So, it's very unfortunate. We're now in contingency planning. And, Brett, maybe a word on how the countryside is teed up. And also, to Chris' point, this will pass. Common sense will prevail in what that ramp looks like next year based on the feedback they've given.

Chris Parkinson

Perfect. Thank you very much.

Brett Begemann

Yeah. Chris, I – just thinking about this, I put it in two buckets. So, you have one side as the regulatory approval for the chemistry and then you have another bucket that's the regulatory approval for the trait. And we've secured China and we're anticipating, given what you already described, that we would have already secured Europe and we've been in a really good position for the soybean seed to fully flow freely for farmers to be able to plant these varieties and experience them to set them up nicely for next year.

Even though they weren't in a position or won't be in a position to spray the herbicide system to see the weed control, they'll get to see the variety performance. This is the challenge now with the EFSA's kind of, call it, slow down and that's why it's so frustrating as it limits the farmers' appetite to be willing to try the varieties.

And to Hugh's point, the days will matter and it's all about now how much we'll be able to accelerate for next year. And how much exposure can we get for the farmers this year to get to see them. I'll tell you, though, the demand for this product is really high. Farmers can't wait to get their hands on it. We know there's challenges out there. It's a great product, so I'm not calling or throwing a flag saying I'm worried about next year yet because I think we're going to get enough of these varieties out there. Farmers are going to see it, and the appetite is going to be really good for next year. So, we're going to stay on our launch plan for next year.

Hugh Grant

Yeah.

Chris Parkinson

Thank you.

Operator

Our next question is from the line of Bob Koort with Goldman Sachs. Please go ahead with your question.

Bob Koort

Thank you. Good morning.

Hugh Grant

Good morning, Bob.

Bob Koort

Hugh, I was wondering if you could help characterize – you noted some more intense competitive behavior this year, but you weren't really putting any escalation in soft commodity prices in your forecast. So, as we think about going into next year when you start that liftoff of earnings growth again, how should we expect, if any, the farmer to behave differently? Or do you think you're really going to need the competitors to behave differently to have a more supportive market next year?

Hugh Grant

I'll just echo. So, thanks for the question, Bob, and it's a hard one to answer because we're just starting planting this year's crop, so speculating on next year's is a wee bit of a stretch from where we stand today. If past history is anything to go on, it's six to eight years since we saw anything like this. When the dust settles, we still – we don't think we lost share through it. It was an expensive exercise for everybody.

So to Brett and Pierre's point, here's how we're thinking about next year. Philosophically, our pricing discipline and our price to the value that we create, we will maintain that approach. It's hard to call at this stage where commodity prices will be. We've got some time as we see how this year's spring and harvest shapes up. But the ethos of bringing incremental bushels and pricing against those is something that we will maintain next year.

And we've seen growers from our order books this year, albeit at lower prices because they're under tremendous pressure. We've seen growers reaching for those level 1, level 2, level 3 hybrids, which is an indication that they are going to look for the best technology. So at this stage, based on what we've seen and what we've experienced, competitive pricing notwithstanding, we will stay the course that's worked for us for the last decade-plus.

Bob Koort

Great. Thank you.

Hugh Grant

Thank you.

Operator

Our next question is from the line of Jeff Zekauskas with JPMorgan. Proceed with your questions.

Jeff Zekauskas

Thanks very much. You've spoken about a positive mix lift in corn offset by negative price trends in local currencies. Is the mix lift as large as it was last year or greater or smaller? And is the farmer trading down or doing the same as what he did last year?

Pierre Courduroux

So I mean, there's components of pricing driven by the competitive situation we talked about. But as far as the overall germplasm mix lift, it's about flat versus last year. I mean, we've seen farmers being, as Hugh was mentioning, maybe more prudent. But there is still – the gray points that we see is that, as Hugh mentioned, the Year 1 to 3, we are still seeing this 50%, 60% of our portfolio in those years. So the dynamic is still there. Now when you look at the absolute number, when you think about the ex-currency germplasm price mix lift, we're going to be about flat.

Jeff Zekauskas

And then secondly, over time there's been more weed resistance to glyphosate and so now newer traits are coming into the market with resistance to dicamba. Does the distributor base or the farmer base say we should pay lower prices for glyphosate traits because glyphosate traits are less effective than they were before? Or in general, do people just move on to the better technology?

Hugh Grant

Yeah, it's – Jeff, thanks. I'd say it's the latter because they're spending so much at the moment on solutions to try and combat this problem that are very, very expensive. So Brett, what are you seeing as you travel?

Brett Begemann

Yeah. I think it's really hard, Jeff, to generalize these things. But generally speaking, exactly to Hugh's point, the farmer is looking at it as what's it cost to me to control weeds today and what's it going to cost me to control weeds tomorrow with the new system. And the really cool thing about dicamba is they all know it. It's been around for a long time and they feel very comfortable with that technology.

So when you look at it today, they're spending substantially more to control weeds, for example, in soybeans than they would've been spending a few years ago because of the resistant weeds. Tomorrow, they'll be able to spend less because they'll use less other herbicides. We'll still encourage them to use multiple molecules, but they'll use less to control their weeds. So it'll be a good deal for farmers when they look at the total benefit of the whole system, both looking at seed and the chemistry package.

Jeff Zekauskas

Okay, great. Thank you very much.

Hugh Grant

Thank you.

Operator

Your next question is from the line of Steve Byrne, Bank of America. Please go ahead with your question.

Steve Byrne

Hi. Just following up on some of these questions on seed sales. Can you just comment on what fraction of your seed sales for the U.S. growing season coming up are actually realized by the end of the second quarter? And from where we are right now, are you seeing any grower decisions changing their planning intentions? Perhaps there are some availability to do that in the northern Corn Belt. Are you seeing anything like that that may be suggestive of where you think the ultimate corn crop could be?

Hugh Grant

Yes. So I mean, we get great visibility in the order books, maybe the puts and calls of what we're – I mean, it's still early-ish. But Brett what are you seeing?

Brett Begemann

I would say, Steve, where we're at today it's more about logistics and moving seed into place. I think, as Hugh mentioned earlier, if you look at the report that came out, where we would agree is that there was strength in corn in the south and strength in corn in the north. Not sure it's as big and bold as they were suggesting that it would be, but we would've been seeing the same kind of thing.

The puts and takes is really wet in the south right now. It's hard to plant. And the price change that occurred with the announcement of the corn expected planting. Beans look pretty attractive now, and then you have the weather. And I always say by the time you get to April, the weather between now and the end of May will have a whole lot more to do with how many acres of corn actually end up getting planted than what the farmers' intentions are based on from a generalization.

They're not going to swing a whole lot from where they already intended to plant. And our order book would say they weren't quite as bullish on corn as the USDA, but we'll see how that one plays out and we'll know that over the next few months. We're not hearing farmers making substantial changes. It's changing the field here and there.

Steve Byrne

Thank you.

Operator

Our next question is from the line of David Begleiter with Deutsche Bank. Please go ahead with your question.

David Begleiter

Thank you. Good morning.

Hugh Grant

Good morning.

David Begleiter

Hugh, just on M&A, do you think there'll be another round of large-scale M&A in the industry in the next period of time here?

Hugh Grant

Yeah, hard part to call, David. I think there's going to be continued – I think the drive towards that integrated acre is going to continue to be important. And when you look at Brett's last point, some of the conversation this morning, it's really magnified in times that are tough for the grower. They're looking for that incremental fraction of a bushel.

I think we've got the technology to unlock there. So there's a piece of the consolidation of things driven by pure cost. I think the winners in this space are those that are going to be able to combine these technologies and unlock a bushel rather than unlocking a dollar of cost synergies.

So hard to call, but I think as we look at it today and in the comments that I made earlier and in my prepared remarks, for us, the path in this is going to be driven less by large-scale M&A, and my guess is a lot more by collaborative efforts in bringing chemistry up on to our 400-million-acre footprint. And that 400 million acres is – there's a lot of leverage on that shelf space and I think it's going to help growers in tough times. So that's going to be our focus going forward.

David Begleiter

And on that same point, is this new or this revised organic strategy – how much less desirable is it than a inorganic strategy for the near and medium term to optimize the value of what you're trying to accomplish?

Hugh Grant

Say that again, David? How much – I lost you in the middle.

David Begleiter

How much less desirable is this organic strategy than an inorganic strategy to maximize the value of what you're trying to accomplish?

Hugh Grant

Well, I mean, we are where we are. I think you play with the cards that you have. If you're contrasting that with and without Syngenta, Syngenta was an accelerant because it got us there I think potentially faster, but the reality – and this is we'll be able to cherry pick what products that we bring up.

So I think it's going to be more asset light. It's going to have a smaller investment base, and we will do, I think, with fewer products. So that's the course that we're charting now at the moment. And I think as every month passes we're getting smarter. On the data science side, the fascinating side to that is you're not waiting for months in the European regulatory approval. You're not pouring fractions of billions of dollars in R&D and you see faster cycle times. So I think they integrate – our confidence on how we integrate this continues to increase the more of that science that we see unfolding.

David Begleiter

Thank you. Very helpful.

Hugh Grant

Thank you.

Operator

Our next question is from the line of John Roberts with UBS. Please go ahead with your question.

John Roberts

Thank you. Is it fair to look at that currency headwind of $0.90 to $1.00 this year in isolation, or should we look at it in combination with the 20% seed price increases in Brazil since those are largely to recover the currency effects? Is there a way to think of the net effective currency since the pricing is to recover currency?

Pierre Courduroux

So that's definitely what we are trying to achieve. I mean, over time, rebuilding from the currency, if you look at the fiscal year, unfortunately what happened to us is with the pricing from last season, so entering into the first quarter, a big part of our Brazilian business happened before we took those actions. Because, as you know, we price in Brazil in the fourth quarter for a season that goes in the fourth and first quarter.

So when you look at our fiscal year this year, the real loss for us regarding Brazil was the first quarter when we didn't have any pricing offsets. When you get into the safrinha season and the summer season to come, definitely what you're mentioning is totally valid. That's exactly what we are trying to do.

So in terms of how to quantify that, I mean, I'm not sure I've got all the numbers in front of me nor the agility to do that on the fly. But definitely this is exactly what we are trying to achieve, so you would say 40% devaluation, 20% price increase. The net should be in this 20% range on the volumes to be sold. Now as you know as well, by the end of the first half we've done pretty much most of our income in Brazil. We still have a big business to come in fourth quarter, but we also have costs in the third and fourth quarter.

John Roberts

And as a follow up, given the upcoming review of the ChemChina acquisition of Syngenta, could you update us on Monsanto's activities in China? You have a partnership, I believe, with Sinochem. And I believe BT cotton is material in China as well?

Hugh Grant

Yeah, we've a long-standing, very strong relationship with Sinochem that goes back probably 15 years. In the recent years we've formed a seed joint venture. We're all in on that venture, so we've taken our best germplasm, our best seeds. And we think we're well-placed within that to be a front runner in what the Chinese call the green channel, which is the accelerated process for approval in new corn hybrids, and I would hope, eventually, new technologies. So we crossed that bridge, Brett, would it be four years ago?

Brett Begemann

Four.

Hugh Grant

Four years ago. So we've been working with that team for a decade and a half. We've been doubled down in seed for the last four years. And Brett and I were there before the end of the year, and then I was back earlier this year. So we've got a good relationship there.

John Roberts

Thank you.

Hugh Grant

Thank you.

Laura Meyer

And Rob, we'll take one more question before we pass it to Hugh for some closing comments.

Operator

Thank you, Laura. The next question is from the line of Sandy Klugman with Vertical Research. Please go ahead with your question.

Sandy Klugman

Thank you. Good morning. So in Xtend...

Hugh Grant

Good morning.

Sandy Klugman

Thank you. It seems the strategy for Xtend soy is similar to what you did when you provided the rebate to cotton growers. What I was wondering is whether or not farmers should expect to see yield differential between Xtend and Roundup Ready to yield soy or seed differently outside of the dicamba tolerance. Is there a germplasm benefit associated with the new seed?

Hugh Grant

Yeah. Yeah. Brett, why don't you cover that?

Brett Begemann

Yeah. So just think of it a couple of ways. So first of all, our newest varieties that we've been breeding to bring forwards are going to be on the Xtend platform. So that'll be our best, highest yielding products, higher than anything else. And that'll be driven on breeding, but breeding with the Xtend technology or Roundup Ready to yield for our weed control.

There's another piece of this, though, that I think is also relevant. As it becomes harder to control some of the tough-to-control weeds and you have to spray more herbicides, you have more risk of challenging the crop with the additional herbicides, as well as the lack of weed control also damages the yield. As you clean up that field, the farmers' going to see the benefit of that as well. So it'll be hard to tell which it's coming from, but both of those are going to add to the overall system and the yield from the varieties.

Hugh Grant

So earlier cleanup and our best varieties, best germplasm. So a lot of parallels with the Roundup Ready 2 system. So Sandy, thanks for...

Sandy Klugman

Thank you. That's very helpful.

Hugh Grant

Thanks for your question. Thanks for all the questions on the line today. Just a couple of concluding remarks to respect your time. So I'd say in closing this morning, we recognize a challenging 2016; challenging for our grower customers, challenging for our industry. But we remain bullish in agriculture and we remain bullish on our position as an industry leader.

We're confident in our long-term standalone growth plan, driven by our emerging blockbuster soybean platforms, our corn portfolio, and as Pierre mentioned, our financial discipline. And importantly, and I hope that came through today, we remain committed to an integrated solution strategy that's driven by innovation and by collaboration. So I think it places us in a very unique position to unlock value for our grower customers and for you, our shareowners.

So I'd like to, on behalf of the team here in St. Louis, thank you for joining us on the call this morning.

Operator

This concludes today's conference. Thank you for your participation and you may now disconnect your lines at this time.

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