Monsanto Company (NYSE:MON) Q1 2017 Earnings Conference Call January 5, 2017 9:30 AM ET
Laura Meyer - Investor Relations
Hugh Grant - Chairman and Chief Executive Officer
Brett Begemann - President and Chief Operating Officer
Pierre Courduroux - Senior Vice President and Chief Financial Officer
Robb Fraley - Executive Vice President and Chief Technology Officer
Vincent Andrews - Morgan Stanley
Don Carson - Susquehanna
PJ Juvekar - Citi
Christopher Parkinson - Credit Suisse
David Begleiter - Deutsche Bank
Chris Evans - Goldman Sachs
Steve Byrne - Bank of America/Merrill Lynch
John Roberts - UBS
Greetings, and welcome to the Monsanto Company First Quarter Fiscal Year 2017 Earnings Conference Call and R&D Pipeline Update. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Meyer, Investor Relations lead for Monsanto. Thank you, Ms. Meyer. You may begin.
Thanks, Christine and good morning to everyone. I am joined this morning by Hugh Grant, Chairman and CEO; Brett Begemann, President and Chief Operating Officer; Pierre Courduroux, Senior Vice President and Chief Financial Officer; and Dr. Robb Fraley, our Executive Vice President and Chief Technology Officer. Also joining me from the Investor Relations team are Priyal Patel and Ben Kampelman.
Today, we will provide our annual R&D pipeline update on this call as led by Dr. Fraley as well as an overview of our first quarter results and the 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 have provided you today with EPS and other measures on both the GAAP and ongoing business basis. Where we refer to non-GAAP financial measures, we reconciled to the nearest GAAP measure in the slides and in the press release, both of which are on our website. This call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risk and uncertainty, the company’s actual performance and results may 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-K 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 first quarter results as shown on Slide 4. As shown in our reconciliations, we delivered as reported earnings per share of $0.07 in the first quarter, which included $0.19 of pending Bayer-related transaction costs. On an ongoing basis, earnings per share were $0.21 for the first quarter of fiscal year 2017, well above the prior year ongoing loss of $0.11, driven by the expected strong start to our business in South America and improved currency.
With that brief overview, let me hand it to Hugh to provide the strategic outlook.
Thanks, Laura and good morning to everybody on the line. As we move in the second quarter of the fiscal year, we continue to remain focused on two things: continuing to deliver on the 2017 operational plan and key business milestones and working closely with Bayer on the necessary steps to close the deal which is targeted for the end of calendar year 2017.
Let’s begin with an update on the deal as shown on Slide 5. First, we are pleased to see the strong share on our support for the proposal to combine with Bayer with approximately 99% of the votes cast in support of the combination. With the vote behind us, our team is working with Bayer on the required regulatory filings and continued key stakeholder outreach. The Hart-Scott-Rodino filings have been made in the U.S. along with several filings and other jurisdictions and we anticipate submission of the required filing in the EU in the first calendar quarter of this year.
We continue to expect the transaction to close by the end of 2017 and our confidence stems from the findings that these are two different, but highly complementary businesses with limited overlap. If those overlaps do exist, however, Bayer anticipates and is committed to undertake a certain level of divestitures as required by the regulatory agencies. Also both Robb and I have been personally involved in extensive grower outreach as well as discussions with key policymakers and politicians sharing our views on the innovation enhancements that we envision from this combination. Innovation is the foundation of the industrial logic for the combination with Bayer just as it was with the consolidation that we led in the industry back in the late ‘90s. An innovation creates jobs and it creates opportunities for both consumers and for our growers. This deal takes what we have been doing for the last 15 years to a whole new level with St. Louis as the heartland for seeds and biotech research for the new company worldwide. 15 years ago, we were spending roughly $550 million a year in R&D. This year, we will spend approximately $1.5 billion in R&D and we look forward to the combined levels of R&D that we anticipate investing in innovation for growers through the combination with Bayer.
Growers seek this innovation opportunity, because they recognize that resources are finite. Demand is real and productivity improvement is the key to their success. The USDA demand figures have indicated that over the past four seasons, world demand for corn grew by over 4 billion bushels while soy demand in the same timeframe grew by over 2 billion bushels. The December WASDE Report indicated continued strength with corn demand for the current marketing year growing by over 1.4 billion bushels and soy demand growing by over 500 million bushels.
In fact, as seen on Slide 6 meeting that trendline demand on a relatively stable footprint over the next decade would require a twofold increase in the rate of yield gain for corn and a fourfold increase for soybeans.
So, the innovation that we expect to deliver with our leading technology platforms as shown on Slide 7 will be necessary to increase productivity to meet this projected demand and we expect the combination with Bayer to amplify that rate of innovation. It all starts with our industry-leading Seed and Trait technologies, which reached approximately 400 million acres today as a result of our broad licensing approach, which Bayer has indicated that they will continue. This footprint serves as the foundation for future germplasm upgrades, new trade technologies, seed treatments through our BioAg Alliance with Novozymes and finally, our unique and rapidly expanding Climate FieldView platform. To reinforce our innovation platform leadership, we continue to expand our capabilities in genome editing, including a new agreement with the Broad Institute.
Our desire to expand the strong innovation core also stems from the myriads of game changing opportunities that we see in the horizon. We are very clearly entering a new era in agriculture. Hundreds of new entrants invested more than $4.5 billion of venture capital in agriculture in 2015, which is more than 10x the investment from just 5 short years ago. More players than ever are seeking to provide new technologies to growers to enhance productivity, both profitably and sustainably. This is for good reason. Demand requires that and we are pleased to see the investment to spur this needed innovation. Our shared vision with Bayer is to harness this wave of innovation and more optimally integrate into format that’s usable and insightful to growers primarily through our Climate FieldView platform. By pairing Bayer’s exceptional crop protection portfolio with our seeds and traits and Climate FieldView platforms, we expect farmers to benefit from accelerated innovation, expanded geographic and crop offerings and optimized integrated solutions from science-based recommendations, at investment space that secures the sustainable food supply needs and deserves this improved rate of innovation. So today Robb will expand in these examples as well as on our own pipeline update.
So, we look forward to updating you on the status of the deal as we move through this year. Until then, we are committed to operate as an independent company focused on delivering our plans for fiscal year ‘17 as well as our key business milestones. With growth in our Q1 results and outstanding demand for our new soybean technologies, we continue to expect our return to earnings per share growth for the full year. As Pierre will elaborate, we are reconfirming our full year ongoing earnings per share and free cash flow guidance with a small increase in our as reported earnings per share outlook.
So with that brief summary, let me pass it to Brett to elaborate on our operational path to delivering 2017. Brett?
Thanks, Hugh and good morning everyone. Let’s begin our operational outlook for fiscal year 2017 with corn, as shown on Slide 8, where we continue to expect corn gross profit growth from global price mix gains, genetic share gains and acreage momentum in South America. In the first quarter, we saw greater than 25% increase in planted corn acres in Argentina and more than a 10% increase in corn acres planted in Brazil. This was accompanied by double-digit price increases and corn germplasm and local currency in both countries.
In the U.S, the early read on the order books supports our intention to grow genetic share yet again. We have priced the majority of our existing hybrids flat to down slightly with our new hybrids at a premium, maintaining our premium pricing compared to our competition. Demand for year one hybrids remains exceptionally strong and we are now in a sold-out position. Also, SmartStax remains a steady percent of our overall portfolio. In addition, we are prepared to respond as necessary to any emerging competitive dynamics, but we have not seen any unusual levels of discounting to-date.
In soybeans, we expect to reach several significant milestones in 2017 as shown on Slide 9. We are off to a good start and still plan to reach an expected 45 million to 55 million acres of Intacta Roundup Ready 2 PRO soybeans in South America as shown on Slide 10. We expect the vast majority of this footprint will be in Brazil. In Argentina, we have seen continued progress toward maintaining a reliable value capture. Recent renewal of the government resolution that enables a testing and invoicing protocol was positive and we continued to work with the industry coalition to secure a seed bill that encourages and rewards investment.
Continuing with soybeans on Slide 11, we are well supplied for more than 15 million U.S. acres of Roundup Ready 2 Xtend soybeans and our order book reflects the overwhelming pent-up demand for this technology. With the EPA approval for in-crop use of dicamba in-hand and as of this morning, we have now already received nearly three-fourths of the necessary state approvals for both soybeans and cotton, which covers the vast majority of the acres and we expect to have the rest before planting. We are conducting extensive training on the use of Xtendimax and the Roundup Ready Xtend crop system delivering multiple training opportunities and tools to provide customers with an excellent experience with the technology.
Moving to our cotton business, we had a strong start in the first quarter with increased acres in Australia. And in the U.S, we now expect the Bollgard II XtendFlex cotton area to exceed 4 million acres including a per acre trade premium. Additionally, this season we will have an introductory release of Bollgard IIII XtendFlex cotton with a full scale launch planned for 2018. This is the first cotton product ever to combine three modes of action for both insect and weed control. Finally, we expect 2017 to be the third consecutive year of share growth in U.S. cotton, coming on the heels of more than 8 points of branded and licensed share growth in 2016.
In Ag Productivity, we are focused on the launch of Xtendimax herbicide with VaporGrip Technology. In addition, generic glyphosate prices have continued to trend favorably over the course of the last several months and our strategy to price just above generics with our glyphosate-based herbicides has already led to some small price increases in the U.S. We also saw nice uptick in glyphosate volumes in our first quarter. However, we did experience the expected glyphosate pricing headwinds and anticipate those will continue into the second quarter as the current global pricing is lower than the prior comparable period. As a partial offset, we have just recently signed an agreement to sell our Latitude weak fungicide business for $140 million. Subject to the closure, we expect to receive an EBIT benefit of approximately $85 million in this segment in the second quarter. This sale is part of our continued efforts to focus and optimize our product portfolio and puts the asset into the hands of Mitsui, who has more potential to drive a greater level of value out of the asset.
And finally, Climate FieldView, as shown on Slide 12, continues to see major advancements as the business and the platform continues to evolve. We released four new product enhancements for 2017 and these upgrades together with outstanding demand for FieldView Plus and Drive have us well down the path to our goal of 25 million paid acres. Simultaneously, we expect to add several more partners to the platform in the coming year and continue to grow geographically with expansion expected in the U.S., Europe, Brazil and Canada this year and in addition to plans to launch in Australia, Argentina and South Africa in the next few years.
With that, I will turn it over to Pierre for the financial translation of these operational plans. Pierre?
Thanks, Brett and good morning to everyone. Let’s start with a review of the first quarter. As expected, ongoing results came in better than the prior year on the strength of our Southern Hemisphere business. Our soybean gross profit is up by approximately 50% in the first quarter with 6 points of gross margin improvements, led by Intacta penetration and currency benefits. Corn gross profit grew by more than 30% due primarily to double-digit price mix lift in local currency in both Brazil and Argentina and from strong growth in acres planned in both countries.
Finally, total operating spend decreased with reduced restructuring expense more than offsetting increases from the pending Bayer transaction costs, currency and growth in commissions in South America. Our Q1 free cash flow of approximately $1.1 billion reflects strong U.S. cash freight demands and includes the payment of the previously accrued PCB personal injury settlements.
Let’s move ahead to our full year outlook on Slide 13. On an as-reported basis and as shown in our reconciliations, we expect our fiscal year ‘17 EPS to be in the range of $3.97 to $4.45. These earnings are expected to translate into $1.4 billion to $1.6 billion of free cash flows. On an ongoing basis, our fiscal year ‘17 ongoing earnings per share is expected to be in the range of $4.50 to $4.90, reflecting the growth we expect for the year. Despite the fact that the year-over-year change in currency rates was modestly favorable for us in the first quarter of ‘17, we continue to assume that the changing rates will have a relatively neutral effect on the full year basis given the recent strengthening of the U.S. dollar against several currencies.
Our Seeds and Genomics segment gross profit is still expected to increase mid single-digits as a percent year-over-year with soybean gross profit alone expected to grow by more than 20% driven by new trade penetration and anticipated cost of goods sold reduction. In corn, growth is expected to come from global genetic share gains and global germplasm price mix lift in local currency that we expect to be flat to up low single-digits in terms of percentages. We expect global corn acres to be roughly flat for the full fiscal year with declines in U.S. corn acreage offset by the early increases in South America.
Shifting gears, our Ag Productivity gross profit is now expected to be in the range of $850 million to $950 million reflecting year-over-year price declines in our glyphosate-based herbicides in the first half of the year offset partially by the benefit of licensing opportunity and expected higher volumes. The adjustment to our gross profit outlook is simply reflecting the fact that the approximate $85 million benefit from the sale of the Latitude business was ultimately recorded in other income for the segment as opposed to gross profit as originally anticipated.
Finally, we expect roughly $100 million of gross profit from strategic licensing deals towards the end of the fiscal year roughly split between the two segments of the business. Our restructuring and cost savings initiatives remain on track as shown in Slide 14 and the estimated cost to deliver those actions and initiatives is now down slightly to approximately $1 billion. We continue to see this opportunity to deliver approximately $380 million in annual savings in operating expenses and cost of goods at the close of fiscal year ‘17 as compared to fiscal year ‘15. However, overall operating expenses in fiscal year ‘17 setting aside the pending Bayer transaction cost and restructuring expenses are expected to increase slightly re-inflation, the cost associated with the return to growth of the business more than offsetting our savings. The expected tax rate for the year remains in the range of 25% to 28%. If we narrow the view to our second quarter, we expect as reported earnings per share and ongoing earnings per share to be roughly $0.20 to $0.50 better than the prior year. Beyond the continued momentum in our corn and soybeans businesses, the expected first half earnings improvements reflects the benefit from the sale of the Latitude business and the absence of significant portion of the Argentine peso devaluation.
Looking forward to the second half of the year, we expect roughly $0.40 less in EPS benefit from strategic deals versus the prior year plus a more challenging currency environment than what we experienced in the first quarter. However, with the strong start in the first quarter and our continued focus on return on innovation and financial discipline, we remain confident in our outlook for fiscal year ‘17.
With that, I will now pass it to Robb to share the update on the pipeline. Robb?
Thanks, Pierre. Good morning, everyone. So, this update is something I look forward to every year. It’s a chance to share an overview of the truly unparalleled science that my team is bringing to farmers around the world. I believe our science and our pipeline are stronger than ever. In fact not only is this the fourth consecutive year of more than 20 pipeline advancements, but our advancement class of fiscal year 2017 also brings a record 14 projects advancing to commercial launch.
As I think about what our teams have accomplished, the most notable highlights are summarized on Slide 3 of the pipeline update deck. What I think is just as impressive as the 28 advancements is the remarkable balance of the advancement class. It showcases the depth and the breadth of the pipeline and this marks the sixth straight year where projects have advanced across all of our R&D platforms whether it’s breeding, biotech, biologicals, crop protection or digital ag and climate. Climate has made incredible progress this year and the digital ag pipeline is now the most robust in the industry with more than 35 projects in R&D, including 6 advancements to commercializations that are all part of the paid elements of our platform.
So, what does this all translate to? Basically, our core pipeline is expected to deliver up to $25 billion in peak net sales with additional upside if we include our newer platforms like Climate and Biologicals. And frankly, I believe the story gets even more exciting with Bayer. We truly see the opportunity to accelerate innovation, optimize integrated solutions and expand offerings and this translates to significant benefits to farmers and I will bring this to life with a few examples later on.
But first, let’s take a look at what our customers can expect from our leading hybrids and varieties shown on Slide 4. Starting with corn, DEKALB continues to deliver the industry’s best performance, marked by 11 straight years of outperforming competitive products and the margin is significant as we see a consistent 7 to 10 bushel per acre average yield advantage. Soybeans have outperformed for the seventh consecutive year with a greater than 2 bushel per acre average yield advantage and cotton continues this trend as well. Deltapine cotton is again outperforming the competition for the seventh consecutive year. So across the board, our breeding engine is delivering results that our customers can count on. That industry leading germplasm performance is being protected by next-generation versions of insect and weed control traits.
Moving to Slide 5, the story here is really around delivering wave after wave of upgrades for corn from additional modes of action to expand the spectrum for insect and weed control. We have significant insect control products coming in SmartStax PRO as well as Trecepta corn. And in weed control, our third generation product in Phase 4 offers tolerance to glyphosate, dicamba and glufosinate to offer growers maximum flexibility in applying the herbicides that make the most sense for their operations. Longer term, the fourth generation insect and weed control traits get even better and this is really remarkable progress towards developing new products for farmers.
Moving to soybeans on Slide 6, we have the opportunity to extend our leadership with insect and weed control solutions. You know there is a good reason why we expect Intacta to land on between 45 million and 55 million acres in South America this year. The technology really works well and the next generation technology is going to work even better. It has multiple modes of action that not only improve the durability of the platform, but also expand the insect spectrum across the broader range of pests that growers care about and that product is already in Phase 4 along with the third-generation of weed control. Again, much like in corn, the next generation insect and weed control traits further enhance durability and spectrum providing new solutions for growers.
Let’s now move from the technologies that have been core to our strategy for years to ones that I think could be transformational in the years ahead. There is a huge opportunity with genome-editing and I have talked recently about the number of deals that we have inked in this space. We are now using these tools to develop the next generation of products that will populate our pipeline in coming years. The deal with the Broad Institute of MIT and Harvard that you referenced is an advancement that has the potential to enable more complex gene edits at an even greater efficiency and that adds to our growing portfolio of capabilities. So with the tools we have at our disposal, we believe we have established a path for developing and commercializing crop improvements based on genome editing.
Our story in biologicals just continues to get better based on our BioAg Alliance with Novozymes as shown on Slide 7. We are especially excited about Acceleron B300 SAT and think it could have a fit on more than 90 million acres. And farmers are going to get their first look at this product this year. Further, we had another year of outstanding results for our NEMASTRIKE Technology with approximately 2 bushels of yield advantage demonstrated in soybeans and 7 bushels in corn and we remain on track for a 2018 launch of this blockbuster nematode control product.
Let me focus now for a few minutes on how the pending combination with Bayer would further accelerate our pipeline and innovation in agriculture as shown on Slide 8. I have talked a lot about the benefits that this combination will bring and I think the bottom line is this deal is an innovation catalyst and we expect it to benefit farmers by optimizing and expanding R&D investment and allowing us to really up our gain. It will accelerate the pace of scientific innovation and our ability to provide integrated seed trait and chemistry solutions. And finally, it will allow us to expand our technology platforms into new crops like wheat and geographies like Asia and Africa. The combination with Bayer is transformative. It’s about putting a complementary pro forma R&D budget of approximately $2.7 billion together to solve the challenges that farmers face and that our industry and society has an obligation to meet.
Let’s start with an important example of accelerating innovation based on combining the highly complementary portfolios from Bayer and Monsanto on Slide 9. Today, herbicide tolerance is the cornerstone consideration for farmers making seed purchase decisions across the number of crops. The R&D challenge is that sequential development of first the herbicide and then the accompanying biotech trait takes a long time. So, the opportunity lies in developing both trade and chemistry on parallel paths and doing so can shave years of the delivery timelines of a new herbicide tolerant system and the accelerated earnings can be invested into additional areas of R&D. We are pursuing this route with PPO tolerance in our agreement with Sumitomo today and we have got the opportunity to do even more with Bayer’s next generation herbicide candidates.
A second example on how the combination with Bayer enables better integrated solutions for farmers is shown on Slide 10. Giving farmers information to select the best combination of seed, trade and crop inputs enables them to make better planting decisions to drive productivity, profitability and sustainability on each field. For example, by knowing exactly which portions of the field needs immediate attention being able to precisely identify the exact pathogen and then quickly determine which fungicide is optimal can help mitigate developing crop disease problems. The detailed knowledge of crop genetics, agronomic practices and local weather, combined with Climate’s imagery, full season sensor data and machine learning algorithms to identify specific diseases can alert and guide farmers to make faster and more informed decisions to protect yields from fungal diseases. So this is where the future of agriculture is heading and these examples are just some of the possibilities that we see.
So in summary, on Slide 11, it’s been another terrific year for the team. We have made phenomenal R&D progress that is balanced across the portfolio. In breeding, we are maintaining the performance advantage that our customers have come to expect. In biotechnology, the story is really about protecting the platforms with newer and better next-generation seed – next-generation insect and weed control traits and our new innovation platforms are developing cutting -edge products like B300 SAT and NEMASTRIKE Technology along with the 6 new products we have launched in our Climate FieldView platform. Our strategy has been focused on optimally integrating these leading platforms and the combination with Bayer will allow our two companies to accelerate the pace of innovation and bring new products to farmers faster through our shared vision.
So with that, I will pass it on to Laura for Q&A.
Thanks, Robb. With that, we would now like to open the call for 20 minutes of questions. [Operator Instructions] Christine, I think we are ready to take questions from the line.
Thank you. [Operator Instructions] Our first question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thanks and good morning, everyone. Robb, maybe a question for you, the USDA in recent years has become – from a regulatory perspective, things seemed to have taken longer and obviously there is a change in the administration coming. So, I am just wondering if you have any view on whether some of the extensions in the regulatory process at least from a USDA perspective, how transitory those could be as we head into the new administration whether regulatory lead times might mean revert back to where they were previously?
Thanks and Happy New Year. I would say that from a USDA perspective, I would actually give credit to the administration that Secretary Vilsack has in the last several years sped up the USDA part of the process. Obviously, we are delighted to have gotten our approval for Roundup Ready Xtend through the EPA, but that was a 6 or 7-year process. And I like the conversation that’s going on about improving and streamlining the regulatory process, not only here in the U.S., but I think around the world and that would certainly be a tailwind going into future years.
Our next question comes from the line of Don Carson with Susquehanna. Please proceed with your question.
Yes, thanks. To your question on the earnings growth outlook post 2017, I mean, your guidance this year implies return to mid single-digit earnings growth. I know both at the Whistle Stop and in some recently disclosed long-range plan projections you have talked about an acceleration post 2017 to the mid-teens. So I am wondering is that still the case and is the driver there really the internal innovation as highlighted by Robb’s pipeline review or are you banking on an improvement in agricultural fundamentals?
Don thanks for your question. I will maybe ask Pierre to say a few words as it relates to some of our early projections, but quite frankly, we are more focused on delivering on 2017 than looking up beyond that at the moment, but the kicker when you get beyond ‘17 is more based on innovation and unlocking growth in our soy and cotton platforms more than the anticipation of rebound in the ag economy, but Pierre, anything that you would add from planning on an assumptions point of view?
No, I think the key message, Hugh is – or Don you said we are not changing our views regarding the future compared to what we shared at the Whistle Stop. So as he was mentioning although we are actually still very bullish about the future of agriculture and based on the demand and the demand growth that continues to happen in both corn and soybeans, I mean, the key growth drivers as we shared at Whistle Stop are based on innovation and we see that in our first quarter with the success of Intacta, but our soybean technology is ramping up in the next 2 years are going to be very important and from a corn perspective we strongly believe that there is definitely room for the germplasm and improvements to continue to see growth into the segment. So no change is down compared to what we shared at Whistle Stop.
Yes, thank you.
Our next question comes from the line of PJ Juvekar with Citi. Please proceed with your question.
Yes, hi, good morning.
Good morning, PJ.
In Latin America, you had double-digit pricing growth in the quarter. Maybe this was driven by the weaker real a year or 2 years ago, but the real is trending now and does that mean that you lose some of this pricing power going forward?
Well, Grant, maybe you have just recently been there. I think PJ, the headline on this is we are delighted to the fact that we could compensate with double-digit price increases in Brazil and in Argentina. You will see some of that smoothing, but Brett, maybe a little bit more color?
Thank you, PJ and good morning. I think it’s a couple of things. Definitely, the change in the currency relationship created part of the opportunity to reach for some of the pricing improvements around double-digits. And by all means even double-digit did not bring back everything that we lost from the past with the currencies. So there is potential opportunity as we continue to look to the future there. At the same time what I think just are more important is the continued performance of our products down there. Intacta continues to do incredibly well. As Robb talked about in his update, we have the son of Intacta right behind that. So, we are looking before the turn of the decade of launching the second generation of Intacta. Our corn portfolio continues to do extremely well down there. We have those next generations of insect control coming there and then germplasm performance as Pierre mentioned. So, all of those things combined setup nicely to be able to continue to look into the future and see incremental value as we deliver incremental value to the farmer, currency being a piece of that, but also the performance of the products.
And secondly keeping with the R&D thing, a question for Robb. Robb, what do you think the CRISPR technology will do for you in terms of genetic gains and when do you seek commercial products out of CRISPR? Thank you.
Sure, thanks. And it’s great question, PJ. So, may be just a little bit of background on the gene editing commentary. So, I think first of all as you recognize there is a variety of gene editing tools. There is protein base. There is nucleic acid base. And just in the last few weeks, there has been a couple of publications on two brand new gene editing systems that have been discovered. In any case, what these tools allow you to do is to go in and precisely change basically any base pair or any gene in the crop. And so there are very powerful tool for making precise changes. I think the other thing that’s important to highlight is you still need a world class breeding engine, a testing network in order to identify and evaluate the best combinations and those gene-editing traits are going to be introduced into corn and soybean and cotton stacked with the biotech traits that are defining the marketplace today. So, we see them very complementary to the breeding and trait engines that we have developed. And I think they will allow us to further accelerate that rate of gain. And I think the fact that we have now concluded licensing agreements with some of the major players and innovative technologies puts us in a great position to take advantage of these products. I mean some of the first gene editing products and some of the smaller crops are working their way through the regulatory system. As I indicated in my comments, we are now fully utilizing these tools and certainly by the beginning or middle of the next decade we will see these gene-editing products work their way into the marketplace. Really an exciting technology and I think we have created a strong position moving forward into the space.
Our next question comes from the line of Christopher Parkinson with Credit Suisse. Please proceed with your question.
Thank you. Good morning. When you generally reconcile what Brett’s team is asking for from customers in the field versus Robb’s R&D initiatives for his team, how do you generally feel your overall long-term strategy is paired and also versus your peers. And then also what were the one to two most pleasant surprises in terms of R&D advancements over the last 12 months and are there even maybe one to two areas which you believe will require additional focus over the next 12? Thank you.
So, Chris, thank you. I will maybe ask Robb to cover the second piece on pleasant surprises. It’s always nice to talk about pleasant surprises at the start of a new year. In terms of the balance between what our customers are asking for and what R&D is producing. You never get complete synchrony in that, but I think over time, we have done really well in two areas. One is anticipating what growers need. Robb made the point that Xtend took 7 years to get through the EPA and that’s been a frustration where the limits haven’t been great signs, the limits have been the regulatory pace and we sincerely hope that that’s going to change. And then I think the other great thing that we have been successful and in this balance that you refer to Chris is having second, third and then sometimes fourth generation products sequentially developed, so that as we are growing acres and meeting demand we have got the next product in development and ready to mover through. So, I would say those are probably two of the synchrony elements, but Robb, pleasant surprises and….
Yes, I think the only thing I would add to you is the comment that you made in terms of how do we make those decisions and trade-offs. I think one of the things that’s always been a hallmark of our portfolio process is that from day 1, we integrate our R&D and our commercial thinking together and so we are trying to bring all of this together to make the right solutions happens for farmers. Chris, I think your core question on what had been the pleasant surprises maybe the hardest question I get this morning, because we have had some terrific results across the platform. I mean, you saw the breeding results there great and with the genome-wide sequencing, with the expansion of our testing facilities that we will have in the Southern U.S. to do more of that work in the greenhouse, we expect to see breeding gains accelerate. We are in a privileged position with building on the fourth and fifth generation of traits. If you had a chance to go through our tour this summer, we have discovered more new insect control genes in the last year than the industry has discovered in its entire history. So that’s a great surprise. I flag the progress in Climate I mean to have now 35 projects in their pipeline. They are hitting on all cylinders. And when you go to our new innovations area, I mean, we are probably talking about being able to launch the largest microbial product ever with B300 SAT. The gene editing tools have really matured quickly in our hands. And I think the NEMASTRIKE product is going to be a blockbuster product in our portfolio. So, it’s hard to pick favorites. There has been some really exciting progress this year.
Great detail. Thank you.
Thank you, Chris.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thanks. Good morning. Brett, looking at pricing this coming season, what’s your level of confidence at what happened last year in terms of the discounting will not reoccur this growing season?
Well, looking specifically at the Northern Hemisphere and narrowing it down to the U.S. given that we are already in the early days of January, I feel somewhat better about that because it’s limited opportunity at this point in time. We are prepared. We are watching everyday to make sure that we maintain our position in the marketplace, but as the days and weeks go by here, the risk of that deteriorates pretty rapidly. Most farmers are well through their path of that decision-making and what they intend to do and making those final purchase decisions, so it’s the opportunity to influence that becomes more limited and I think the industry understands that.
Our next question comes from the line of Robert Koort with Goldman Sachs. Please proceed with your questions.
Yes, good morning. This is Chris Evans on for Bob. Again, we are seeing headwinds from glyphosate pricing. Could you describe maybe when that could find a bottom given that I think in previous quarters you mentioned that some of these exporters might be operating near breakeven?
Yes, I will maybe ask Brett just to put a bit of color on timing. I mean, the good news, Chris, as we have seen – we have seen an uptick on Chinese pricing as we referred to in our prepared remarks and we made small move in the U.S., but if you look at the season coming and the spring through early summer timeframe maybe just a little bit of color on how price could play out in that timeframe?
Sure, Hugh and good morning. I think the key thing about as we look at the first quarter what transpired in the first quarter with glyphosate is very consistent with what we expected. We expected our pricing to be less than the comparable period to last year. That being said, we do see really positive indicators as Hugh noted with the asset prices starting to move in China in the right trendline or a positive trendline. We are seeing that starting to show up in the generics. That’s what gave us the opportunity to make the small adjustment in our price to the positive side in the U.S. We continue to watch the rest of the markets around the world and we will continue to look for those opportunities. And my anticipation at this point is we will continue to move in that direction for the reason that you noted. It’s not been an exciting business for many of them. The other point that I would make is not only did we see some improvement in that area. Our volumes are really strong in first quarter in our brand of business. So I feel really good about our position in the marketplace and how we are priced and the trendlines are favorable at this point.
Our next question comes from the line of Steve Byrne with Bank of America/Merrill Lynch. Please proceed with your question.
Yes, thank you. Just wondering whether you think you will likely commercialize Xtend soybeans down in Argentina if that country promulgates a seed law as currently drafted that has some limits on royalty payments to 3 years or fewer. Is that commercially viable for you?
Well, we have been – so first of all, we are really pleased to see progress in Xtend and hope to see it spread across Brazil and Argentina, but we have been watching the development of this very, very closely. I mean, Brett, maybe a little bit of color on our stance and the position that we have taken there.
Yes, sure and good morning, Steve. I think it’s really important when we think about Argentina that we step back a bit and look at – put a little context around it. We have been at this for sometime now working with the farmers and the government to get a system in place. And we had one and that got disrupted, but the good news was last summer in about June, there was a resolution that put it back in place where we could have mandatory testing as well as invoicing. That resolution has been extended. So, that gives us an opportunity for the next growing season that we could not just this one, but I guess we think about the next one. The coalition is working extensively with the government to build the new seed law. The previous seed law that you referenced with the 3-year for the industry is a nonstarter. I mean, 3 years of – compared to the rest of the world with the teams years of intellectual property protection is a nonstarter. So that would not encourage us to bring any additional technology to Argentina. At the same time, there is receptivity within the government and then conversations to look for a seed law that addresses their concerns and the industry’s concerns and get to a place where it encourages investment in agriculture and to do that, you need you reward those that are driving innovation. So, we are prepared to continue to drive the innovation as Robb noted in our soybean portfolio. Most of those products have a great fit in Argentina, but until we see an improved situation and have more confidence around the value, we will stick with just working with Intacta right now and then we will look to others as the situation evolves.
And Christine, this is Laura. We have time for questions for one more.
Our final question will come from the line of John Roberts with UBS. Please proceed with your questions.
Thank you. With Kim China buying Syngenta and DuPont Pioneer working more closely now with Origin Agritech, can you give us an update on your relationship with Sinochem and what your thoughts are on China?
John thanks for the question. We have the relationship with Sinochem for a long time. It’s a good relationship. It’s a strong one. We have been working jointly on cotton business in China. So we see an opportunity in China. I think it’s long-term. I think it’s going to take a while and we anticipate the first biotech traits commercialized in China are probably going to be Chinese. So, it’s a patient game. I don’t think that it’s – one of the early questions was growth beyond ‘17 and the acceleration in growth beyond ‘17. We don’t see China being a major contributor to that in the next 2, 3, 4 years. It’s going to take a lot longer, I think.
Great, thank you.
Thank you very much. So, to Laura’s point, I just wanted to thank you for taking the time to join us this morning and for your support. Going forward, as we look into 2017, we will be streamlining some of our investor communications, particularly around conferences and I think that’s typical of a target company at this stage and our combination with Bayer. However, we look forward to continuing to update you on our traditional quarterly earnings calls.
So as we close out this morning, it’s clear that the year ahead will be a significant one for Monsanto and we are really clearly focused on our two key deliverables. To that end, our plan to return to EPS growth in ‘17 is tracking nicely, we are encouraged. And we have passed our first significant milestone with really strong shareowners support on the agreements combined with Bayer. So on behalf of the Monsanto team, I would like to thank you again for joining us on this call for your support and we would like to wish you all the very best in the new year. Thank you very much.
Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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