Monsanto F4Q07 (Qtr End 8/31/07) Earnings Call Transcript

| About: Monsanto Company (MON)

Monsanto Company (NYSE:MON)

F4Q07 Earnings Call

October 10, 2007 9:30 am ET


Scarlett Lee Foster - Investor Relations

Hugh Grant - Chairman of the Board, President, Chief Executive Officer

Terrell K. Crews - Chief Financial Officer, Executive Vice President


Peter Butler - Goinhil Investments

Frank Mitsch - BB&T Capital Markets

Jeff Zekauskas - J.P. Morgan

Kevin W. McCarthy - Bank of America

Mike Judd - Greenwich Consultants

P.J. Juvekar - Citigroup

Robert Koort - Goldman Sachs

Lawrence Alexander - Jefferies & Company

Mark R. Gulley - Soleil Securities

Donald Carson - Merrill Lynch

Vincent Andrews - Morgan Stanley


Ladies and gentlemen, thank you for standing by. Welcome to the Monsanto fourth quarter and fiscal year 2007 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Scarlett Foster, Vice President of Investor Relations. Please go ahead, Madam.

Scarlett Lee Foster

Thank you, Sean and good morning to everyone. I would like to welcome you to Monsanto's 2007 fiscal year-end conference call. I am joined this morning by Hugh Grant, our Chairman and CEO; by Terry Crews, our CFO; and also joining me this morning are Brian Hurley and Laura Meyer, my colleagues in investor relations.

Before we begin, I would like to remind you that we are webcasting this call and you can access it at Monsanto's website at The replay is also available at that address. For those of you who would like to go to our website, the slides for this call are posted on the investor information page and we’ll refer to the page numbers which are on the bottom right-hand side of each slide.

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

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

I need to remind you that this call will includes 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 vary in a material way from those expressed or implied in any forward-looking statements.

A description of the factors that may cause such a variance is included in the Safe Harbor language contained in our most recent 10-Q and today’s press release.

I would like to start with an overview of our performance for the fourth quarter and the fiscal year, as shown on slide four. For the quarter, revenues increased 13%, reflecting a strong conclusion to the U.S. corn seed and trait business, and a solid early start to corn seed and trait sales in Argentina and Brazil.

For the full year, we set a sales record of $8.6 billion, driven by the leadership of our U.S. corn seed and trait business, market share and sales gain for the international corn seed business, along with stronger-than-anticipated sales of Roundup herbicide. These gains were offset by lower sales of soybean and cotton seeds and traits, both of which reflect the decline in planted acres in the U.S. for soybeans and the U.S. and Australia for cotton.

On an absolute basis, gross profit rose 22% for the full year. Company wide margins improved to 50%, an increase of two percentage points over fiscal year 2006 and well on track for our projected 52% to 54% gross margin target in 2010.

Corn margins were up significantly, with an improvement of 4.5 percentage points. Margins for Roundup were up by five percentage points, reflecting branded pricing that exceeded the upper end of our historical $11 to $13 band. This improvement in Roundup margins offset the decline in both soybean and seminis margins.

Write-downs of inventory drove the decline in seminis margins and higher soybean commodity prices and reduced soybean acreage resulted in the reduction of soybean margins.

If you move to slide 5, you will see that our ongoing EPS for the fourth quarter was a loss of $0.18 in 2007 versus a loss of $0.21 in 2006. For the full year, ongoing EPS was $2, an increase of 54% from fiscal year 2006 and our third consecutive year of 25% plus ongoing EPS growth.

On an as-reported basis, EPS includes the results of our Stoneville and NexGen business and the related gains on their sale is discontinued operations. The quarter and the year also reflect a $186 million in-process R&D charge associated with our completed acquisition of Delta and Pine Land.

Free cash flow included $1.9 billion in cash from continuing operations from higher net income and incremental working capital improvements. A substantial portion of this cash was used to finance the Delta and Pine Land acquisition, as we used approximately $1.9 billion in our investing activities in 2007. In total, we had a use of free cash of $57.

With that short overview, I would like to turn the call to Hugh, who will summarize this year’s performance but more importantly, outline the path of growth in 2008.

Hugh Grant

Thanks, Scarlet and good morning to everybody on the line. By every measure, 2007 has been an extraordinary year and our results speak volumes about who we are as a company today and who and what we will be in the future.

As I look back in 2007 on slide 6, there are several overarching themes that strike me. First, we more than delivered on our commitments and that’s resulted in an ongoing EPS growth rate of 25%-plus year-on-year growth for the last three years. We delivered impressive share gains in corn seed in nearly every key market around the world and in the U.S., organic share grew across all three channels in both corn and soy.

Whether it’s market share gains in corn around the world, accelerate the trait penetration, or the emergence of triple stock traits as the product of choice on farms, if we said we were going to do something or turn something around, we did.

Where there’s work to be done, such as in seminis or on cotton, we’ve tried to be very open about our plans for growth. Second, we’ve taken the competition seriously and farmers have voted for our superior performance globally with their pocketbooks. We’ve now reset the standard for the corn seed industry worldwide with the pending launch of SmartStax.

In potentially three short years, this breakthrough product will be the preferred platform for corn seed and the foundation for blockbuster traits like drought tolerance, nitrogen utilization, and greater yield. In its own way, SmartStax brings the promise of yield traits forward. After the launch of SmartStax at the end of this decade, we are only two to three planting seasons away from the introduction of the first product from the drought tolerance family.

Third, we continue to cement our reputation as the leader in this industry and as such, we’ve clearly emerged as the partner of choice. From the DSF collaboration for yield and stress to hundreds of technology collaborations stretched across the globe, it’s becoming increasingly clear that if you want the right partner in agriculture, Monsanto is your go-to company.

By every measure, our R&D program is firing on all cylinders. The power of our breeding program has been exploded through all four of our crop plant farms and the proliferation and magnitude of our biotech traits is really quite staggering. Our approach to R&D reflects our core business philosophy; that is, to bring farmers the best possible products, whether uniquely created in our labs or by collaborators.

And fourth, we are investing for continued sustainable growth. We funded acquisitions for growth in Delta and Pine Land, the American Seeds companies, and most recently the Agroeste corn seed company in Brazil, all with cash from operations.

We’ve committed $610 million through 2009 in capital expenditures to meet the anticipated demand for our higher yielding corn seed. At the same time, we are tunneling free cash each year to shareowners through dividends. Approximately $258 million in fiscal year ’07 and most recently, we raised the dividend by 40%. Additionally, we’ve repurchased $311 million in shares through the first 22 months of our cotton four-year $800 million repurchase authorization.

So from that foundation, we are now targeting ongoing EPS of $2.20 to $2.40 and free cash of $800 million to $900 million in fiscal year 2008. As always, this is our commitment to you of what we absolutely can deliver, given realistic assumptions about the macro agricultural environment and full consideration to the upsides and the downsides of our business.

I often say that our bets for the future are placed early and in fact, we are tunneling in some of the chips on those bets right now, as farmers are running their combines through the fields in the northern hemisphere and they are tuning up the planters in their sheds in the southern hemisphere.

Ironically, in just a few short months, we will make the planting decisions for 2009 sales, including the ramp-up schedules for Roundup ready to yield soybeans and SmartStax corn.

Terry will take you through the financial bridge to 2008. Before he walks you through that detail, I would like to tell you about the four things that I think we absolutely have to deliver, and those are: our position in corn, driven by our performance, not acreage swings, has to be bigger; our international business needs to move to the forefront; our recent acquisitions must deliver at accelerating rates; and we have to position ourselves for future growth through new product launches and potentially through acquisitions.

So if I start with corn on slide 7, the premise is really quite simple. We intend to grow share of our DEKALB brand in every key region around the world by one to two share points. The only exception to this is in Brazil, where our tropical breeding programs got a late start compared with the temperate hybrid breeding. In Brazil, we intend to hold share for the DEKALB brand and begin the rapid integration of the Agroeste germ plasm pool into our breeding programs. Overall, we expect to hold our market-leading 40% share position in Brazil in 2008.

From a trait perspective, the race in the U.S. is on to capture more of what we alone have been able to define as a larger market. We believe that the total corn trade opportunity is more than 50 million acres, or 35% larger than the one that we contemplated this time last year.

As you can see in slide 8, we are on a trajectory to go from 121 million U.S. corn trait acres in 2007 to a total trait acreage opportunity of between 185 million and 205 million acres in the 2010 season.

Our success rests squarely on the shoulders of triple stack penetration. DEKALB, ASI, and our leading licensees will be the pace curves with greater than 50% of triple availability in 2008. In comparison, two of our large national competitors have publicly targeted somewhere in the order of 20% to 30% triple stack availability for 2008.

We are so confident in our ability to service demand for triple stacks this year that we’ve offered a program that gives a discount on replacement seeds if what is delivered to the dealer or grower doesn’t match the quantity and type of seed ordered.

This leadership in triples foreshadows the future. I think of it this way; by the time that the competition can meet the true demand for triple stacks, we believe our customers will want the performance advantage of the eight way SmartStax.

The one to two share point target that we’ve now set globally is the footprint for the emergence of our traits internationally. While on an admittedly smaller base, our international trait growth on a acreage basis for 2007 marked the third straight year of 20%-plus gains in trait acres outside the U.S.

By 2010, we believe the opportunity for international traits will be nearly three times the penetration in 2007.

The international potential has been in the shadows but there’s been some breakthroughs that pave the way not just for optimism but for real returns, so let me use slide 9 as a reference point.

We ended the 2007 crop year for Roundup ready soybeans in Brazil with penetration of better than 50% and we are squarely on track with the penetration goal of 95% by 2010. We are targeting another year of growth and acres planted with Yieldgard corn borer in Europe in 2008. Although the numbers of acres being planted is in the hundreds of thousands rather than the millions, we believe we are increasingly approaching a tipping point favoring more widespread planting.

A multi-year external study across seven countries published in 2006 showed European farmers were experiencing a 10% yield boost form Yieldgard corn borer. That’s a bigger yield bump than U.S. farmers have experienced because of the greater severity of the corn borer problem and the corresponding higher yield loss.

While it’s not a financial driver in 2008, we’ve received two significant corn trait approvals in Latin America that speak to the expansion of the international opportunity. In August, we received approval from the Argentine regulators for the Roundup ready Yieldgard corn borer stack, clearing the way for the first stack trait sales in Argentina.

With some innovative off-season bulk-up this summer in the U.S., some small commercial quantities of seeds are going into the ground as we speak. With the expanding corn acres in Argentina, we believe the available acres for a stack combination now stands at 7 million acres, up 75% from our earlier projections.

We are also encouraged by CTN buyers approval in August of Yieldgard corn borer for Brazil. Brazil plants 20 to 25 million acres of hybrid corn in any given year and 100% of those acres are infested with corn borer, leading us to believe that the opportunity for this trait is 15 million to 20 million acres.

Our recent acquisition of Agroeste in Brazil expands our base for launch for this trait, adding ten share points to our existing corn seed share base of 30%.

Cotton in India had an extraordinary year, of which roughly 14 million acres of Bollgard and Bollgard II were planted, which is up by 67%. We’ve increased our 2010 cotton trait targets to 15 million to 20 million acres, increasing our available acreage by about one-third.

In its first year of commercial scale, there were roughly 1.2 million acres of Bollgard II, or approximately 8% of our trait acres. We will rapidly convert the market to the second generation offering, which provides a gross profit lift as Bollgard II sells for roughly a 20% price premium.

So here’s one last thought in the potential that’s about to be unlocked internationally; there’s significant upside and real events to justify the optimism, all before we even tap into the pipeline. But all of this is said and done with a mind towards conservatism, recognizing the economic and the political uncertainties always associated with ex-U.S. markets.

To that point, we are still engaged in court battles in Europe over Argentinean soybean fees, one of which went against us just a few minutes ago this morning. While it is disappointing, we haven’t included Argentinean soybeans in any of our financial projections.

So within the mix of our broader portfolio, we think that we’ve balanced the opportunity with the lowest risk profile in our history as a company.

As we expand the potential of what we have in hand around the world, we also have to unlock the value of our recent acquisitions. Both Seminis and Delta Pine Land were underleveraged assets as cotton and vegetable seeds have been starved for technology and productivity gains, primarily from a lack of broad scale investment in breeding technology.

In the case of Delta and Pine Land, this was exacerbated by a hesitance to make a wholesale commitment to trait upgrades and the ascension of aggressive competitors like FiberMax.

So our task in 2008 is to unlock the potential in both. Seminis has emerged more slowly than we would have liked and in hindsight, we probably should have been more aggressive from the start to address back-to-the-shop issues like SK new management and inventory composition.

While the cleanup of the business is taking longer than we would have liked and one-time charges have hurt the momentum of margin growth in the rest of the business, the sales performance is on track as we move into 2008.

On a sales basis, we crossed the $600 million mark on total annual revenue from a product portfolio that’s now been trimmed significantly. This reflected the cumulative increase in price of approximately 4% but also reflected parity benefits of just over 2%. Regardless of parity, we remain committed to pricing for greater value in this segment.

Some of the growth will come from what we have in hand and some will come from the introduction of new varieties. The biggest contributors from a sales perspective were tomatoes, peppers, and eggplants, and they accounted for approximately 27% of the sales. For the future, the market assisted breeding program is moving much faster than we anticipated and we will have 1,500 markers identified in tomatoes by the end of this calendar year. That’s a 50% higher number than our original target and one of our largest vegetable crops.

So if we do these things and we do them well, we will set the platform for the periods when our molecular marker technology can really begin to create step change in the vegetable industry.

Vegetable seeds continue to be an exciting proposition and we think we can change the game in vegetables the way that we have done in corn and in soybeans.

The integration of Delta and Pine Land is progressing rapidly. This was a market that we already knew very well. In fact, much of that work has already been completed and our full focus is on the turnaround of Delta and Pine Land from its share loss in 2007.

On a planted acre basis, which puts it in line with how we at Monsanto report market share for our other grow crops, Delta and Pine Land share decline nine points to 46% in 2007.

As we’ve brought Delta and Pine Land into the Monsanto family, we’ve made the commitment to the technology muscle that we pioneered in corn and soybeans back into the cotton franchise.

So you should look for two things in 2008; first, you’ll see a greater penetration of second generation traits. In 2007, Delta and Pine Land offered just 17% of its portfolio with second generation traits. This compares with an industry average of 41%. While most of the production decisions for next year were made before Monsanto's acquisition, we still expect second generation trait penetration to increase to 30% of Delta and Pine Land’s portfolio in 2008.

The first step in our renewed breeding focus will be the stabilization of share in 2008, with an eye towards significantly changing the production planning for the 2009 season and introducing a rejuvenated product lineup as we reach the end of the decade.

The ASI acquisitions have been remarkably successful, with rapid integration, swift technology uptake and significant accretion. This model, never seen before in seeds, has turned in a significant player in U.S. corn, with 9% total market share this year, including a one percentage point gain from organic growth.

This validates the value of bringing better technology faster to farmers and the seed brand that they’ve trusted for years. ASI has also provide a lift to soybeans, bringing another seven points to the table and just over a 0.5% of that in organic growth in 2007.

In 2008, we would expect ASI to continue its strong growth, Seminis to deliver its full financial potential plus new growth, and Delta and Pine Land ongoing income from operations to be at worst break-even to modestly accretive in our first full year of owning the company.

Beyond acquisitions, our R&D pipeline is without doubt the heart of our growth prospects, and as you can see in slide 10, in the course of the last 12 months, we’ve made some significant advancements that set the stage to catapult many of our leaps from research fields to the farmers’ fields.

First, in March we announced our yield and stress collaboration with BASF. We believe that this connects a fire hose of new gene leads to our established pipeline, allowing us to target the emerging opportunity of yield and stress with more genes and with a faster succession of product upgrades.

While the BASF collaboration rightly earned most of the headlines, our overall R&D network also grew. In 2007, we inked 30 new deals, expanding the horsepower of our R&D engine through active ingredients with more than 500 entities in the private and public sectors globally.

Second, earlier this summer, our Roundup Ready2Yield soybeans became the first second generation soybean trait to earn regulatory clearance in the United States, setting it on a clear commercial path.

Roundup Ready2Yield becomes the centerpiece of a rejuvenated soybean trait plant farm. Farmers that make the investment in Roundup Ready2Yield can expect more than just the yield and plant health benefits of this particular trait.

Our customers will have the unique opportunity to access a platform of potentially three or more new traits that could be stacked on top of Roundup Ready2Yield by the middle of the next decade.

So our priority in 2008 is to expand the soybean footprint with share gains in [inaudible] and ASI, building off of their total gains of over 2.5 percentage points in 2007. At the same time, we’ll be completing regulatory reviews globally and making the production decisions for ’09 and 2010.

So as we take a peek back at 2007 for one last time, I am more bullish on Monsanto's position and their opportunity today than I have been at any other point in my tenure as CEO, and in no small part because of what we accomplished in 2007.

Between our four crop areas, corn, cotton, soy and vegetables, we’ve tremendous balance and potential for new growth. That balance insulates us from the cyclicality of the year-to-year swings in agriculture, but more importantly it’s balance that anticipates where agriculture is going and it puts us in a trajectory to meet the trends before they emerge, which in turn translates to a competitive advantage, leadership and growth.

As I always say, we have to earn the farmer’s business each year. As farmers across North America and Europe are running their combines through the fields literally as we speak, it’s an important reminder to all of us that this business is all about yield.

So as we’ve said numerous times before, we are pleased to have had such a successful year in the books, but we know that it is our continued focus and our relentless drive that will continue to earn us the respect and the business of those farmers. If we do that, we will achieve the growth we’ve identified for 2008 and we will have our platform for growth well into the next decade.

For those of you who will be joining us in November the 8th for our investor day here in St. Louis, we’ll be looking out to the growth potential for Monsanto for the next five years, stretching out to 2012.

So on that optimistic note, let me turn the remaining time over to Terry.

Terrell K. Crews

Thank you, Hugh and good morning to everyone on the line. As Hugh said, we must earn the farmer’s business every year and financially, that starts the clock running again for us at the start of every fiscal year.

Just as a farmer harvests his yield to determine his next year’s crop, we have to harvest sales and gross profit from 2007 to provide the platform for 2008 growth. 2007 was a remarkable year with a wealth of positive financial results that are almost too numerous to mention.

If you look at slide 11, you will see a summary of our financial highlights. As CFO, I am most struck that gross profit as a percent of sales advanced two points in 2007, as return on capital grew by four percentage points. This speaks to our ability to grow and to do so while returning against a larger asset base.

As a company, we are also strongly driven by cash generation. On the free cash side, we saw use of cash of only $57 million, including the acquisition of Delta and Pine Land. This free cash flow performance represents a significant increase in cash from operations, reflecting our improved earnings and stronger-than-expected collections on receivables, especially and I would say most proudly in Brazil and Argentina.

Receivables as a percent of sales came in at roughly 18%, down 2% in the year-on-year comparison. Inventories as a percent of sales also declined to 20% in 2007 from 23% in 2006. These gains were offset by cash used to finance major acquisitions and higher capital spending, both for future growth.

Finally, our 2007 performance was achieved while we maintained good spending control. SG&A as a percent of sales was flat, even as we absorbed our Delta and Pine Land and ASI acquisitions, and accommodated higher variable compensation, particularly for our sales force, given our better-than-expected performance.

As we forecast 2008, there are strong operational results that will carry forward and some financial benefits that likely will not. Collectively though, if you would refer to slide 12, we are committed to path that leads us to an ongoing EPS of $2.20 to $2.40, with a free cash flow of $800 million to $900 million.

On a quarterly basis, we would expect to follow our historical EPS pattern of a smaller first quarter, although I would expect our 2008 first quarter will be somewhat stronger than last year because of the continued strong sales of Roundup, particularly in Latin America.

The bulk of our earnings will flow through in the second and third quarters, followed by a loss in the fourth quarter. This 2008 ongoing EPS guidance puts us on a trajectory for a year-over-year growth rate of up to 20%. That’s a growth rate that we believe is achievable and captures the continuing momentum that Hugh described. At the same time, it’s a growth rate that recognizes the effect of growing off a gross profit base that has nearly doubled in four years.

There are several general factors to consider about the 2008 fiscal year. First, we expect that the majority of our growth will be organic growth. Naturally, that growth will be weighted towards our seeds and traits business and enhanced by share growth, technology penetration, and pricing opportunities, particularly in corn.

Overall, we expect the gross profit contribution from the seeds and genomic segment of approximately $3.5 billion, up 17% from the $3 billion we achieved in 2007.

For 2008, we expect gross profit from Roundup to be approximately $950 million, with the potential for continued strong volumes and pricing.

All of the other businesses in the Ag productivity segment should contribute gross profit of roughly $350 million.

We would expect the gross margin mix and the source of our improvement in 2008 to be driven by the seeds and traits as corn grows globally, soybeans and cotton are stabilized, and profitability is not encumbered by one-time events.

Collectively, the ag productivity segment is expected to be flat with gains from Roundup offset by anticipated declines in selective chemistry and [post-like] businesses. Any upside to this gross profit projection will likely come from corn seeds and traits globally and from Roundup pricing more wide.

In its first full year of begin run as an integrated business under Monsanto, we would expect that Delta and Pine Land income from operations would result in earnings that would be break-even to slightly accretive by a few cents. As Hugh indicated, production decisions for 2008 were made before Monsanto's acquisition was complete and we’re not as aggressive on second generation traits as we would have been. However, this reflects a significant opportunity going forward for us as we are able to fashion Delta and Pine Land’s business after the successful technology integration in commercial operations we have seen in DEKALB and [Asgrow].

On the expense side, R&D again should fall in the 10% of sales range and we plan to continue to move SG&A as a percent of sales toward the 20% to 21% range.

Two factors that affect the growth rate are financial in nature and we don’t anticipate that those benefits will carry forward into 2008. First, net interest expense in 2007 was below our historical average, as our average cash balance on hand was higher than the prior year, with increased sales and an anticipation of the close of the Delta and Pine Land acquisition.

In 2008, we would expect a more normalized run-rate in the range of $60 million to $70 million.

Secondly, our tax rate for the ongoing business should be approximately 30%, compared with approximately 26% in 2007, which was reduced by a series of discrete events. The combination of our underlying growth, unlocking new value and the effect of a more normalized net interest expense and tax rate creates an interesting dynamic. To grow our ongoing EPS by 20% over 2007 results, we will need to grow EBIT by 30%.

Turning to free cash, our range of $800 million to $900 million assumes that operating cash reflects our ability to continue to translate earnings into cash. CapEx will be approximately $700 million, reflecting our historical maintenance level plus the additional cost of our corn seed plant investments.

We’ll continue to use free cash to repurchase shares as we have historically. We will continue to review the return of free cash to shareowners through dividend. The combination of share repurchases and dividends in 2007 returned $455 million in cash to shareowners, and this was before our recently announced 40% increase in dividends.

Because of the addition of the large asset base of Delta and Pine Land for the full year, ROC is likely to flat to up modestly in 2008, but will accelerate in 2009 and beyond.

Overall, 2007 was a phenomenal year and from a commercial and financial perspective, 2007 has given us a strong platform for 2008. As you can see on slide 13, we are in a unique position in agriculture to be able to project double-digit earnings growth, substantial cash generation, 50%-plus gross margins and continued commercial growth year-on-year, while we reset the landscape for the future leadership.

We don’t take this opportunity for granted. The pause for celebration has been brief and we are very focused on delivering our 2008 commitments. We recognize that we earn our success one season at a time, but we also know that each season presents commercial and strategic milestones that help us build toward our goal of 52% to 54% margins by 2010.

When we get together in November for our investor day in St. Louis, we will further spell out our financial expectations and key metrics looking in to 2012.

With that, let me turn the time back over to Scarlett for questions.

Scarlett Lee Foster

Thanks. We’d like to open the call to your questions and ask that you would please hold them to one per person so that we can take questions from as many people as possible. You are also welcomed to rejoin the queue for a follow-up question. Sean, if we could go ahead, please.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Peter Butler with [Goinhil] Investments.

Peter Butler - Goinhil Investments

Good morning. You probably don’t have to give a talk today, Hugh. You can just take a bow. My question is if we can assume that Monsanto gets into the market two years in advance of everybody with the drought gene, what could happen to your market share during that two-year period?

Hugh Grant

It is some ways away but I think that the drought gene is going to be -- based on what I’ve seen in the field this year, I think the drought gene is going to be an absolutely spectacular product.

I will tell you how I’m thinking about it; the bubbles have kind of left the champagne for ’07, we’re dusting ourselves off and we are well into ’08 and we need to capture a whole bunch of share between now and the launch of drought, so I’m not holding my breath hoping that drought is going to be the thing that propels share. We are aggressively mining out share and there’s, by my math, there’s three or four springs between today and the launch of drought.

But I am encouraged with the performance and the only other piece I would add is the launch of drought in itself isn’t a one-point -- isn’t one point in a year. We are going to see a whole family of these drought products coming in behind it, so we will be upgrading as we are launching and that’s all going to be done on top of this revolutionary new SmartStax platform.

I am eagerly anticipating share growth before we get to drought.

Peter Butler - Goinhil Investments

I think you told me once that you thought in the future that every corn seed would have a drought gene in it. If that’s true and you get into the market two years in advance of everybody, that implies that you are going to have a very substantial increase in market share just due just one of them.

Hugh Grant

Well, I’d take that future outcome. The point I was trying to make is there’s a bunch of blocking and tackling, which is what I think our strength is. I do think that the vast majority of corn acres over time will have some form of drought gene in them, whether that’s on an irrigated basis or dry land farming. I don’t know what it’s like where you are today but we are basking in a summer that just keeps going and going down here, so if the future continues to get warmer, then drought is going to become -- a drought gene is going to continue to become more and more important.

Peter Butler - Goinhil Investments

Super. Thanks for the help, Hugh and take another bow.


Our next question comes from the line of Frank Mitsch with BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

Good morning. Terry, you said that looking at the fiscal first quarter, you’d expect it to be stronger than last year. Can you elaborate a little bit more on that?

Terrell K. Crews

I think it will be a bit stronger for two reasons; the predominant reason is continued strength of Roundup in our Latin American markets. We had a good year in the Roundup business and that’s largely been driven by Brazil and Argentina, and we expect some of that to continue as they move into their planting seasons now.

Secondly, a little bit stronger corn business, particularly in Argentina. In fact, in fourth quarter we saw some up-tick in corn in both Brazil and Argentina, but particularly in Argentina, so it’s really on the strength of our Latin America business that we would expect our first quarter to be up versus last year.

Frank Mitsch - BB&T Capital Markets

And you talk about the, or Scarlett mentioned earlier on about Roundup pricing trends being higher than your recent global averages. How long do you anticipate that strength to continue? Should we start modeling in $14 per gallon Roundup? Can you talk a little bit more about that?

Terrell K. Crews

One of the interesting dynamics we’ve seen in Roundup pricing, and we have been above our normal $11 to $13. A lot of that has been in the international markets, particularly in Latin America, so I am not quite ready to model in the sustained Latin America pricing yet but it is good that it is happening now and we are taking advantage of that.

I just want to remind as well that part of this is beginning to see us pass on some of the costs that we incurred in the prior two years with increased raw material costs in Roundup, so we went from a time where we were pricing in the band with higher costs and we are seeing some of that work through the market as well now.

Frank Mitsch - BB&T Capital Markets

All right, great, and then lastly, Scarlett started off the presentation by talking about this being the third year in a row with 25%-plus EPS growth, and in fact over the past three years, prior to the results, your initial guidance was factoring in somewhere between 10% to 20% EPS growth and you’ve outperformed that quite significantly over the past three years.

Should we start thinking that Monsanto is sandbagging a little bit here in terms of the strong agriculture season that’s in front of us?

Hugh Grant

Let me take that. We’ve been at this for four or five years now. We’ve enjoyed tremendous growth. I think there’s tremendous growth in the segment, particularly given the strength in agriculture. But when we issue guidance, especially at the start of the year, we are literally combining crops. Spring, when we plant this stuff is still a ways away. Our view on a 20% growth rate on the top end of this is a commitment and we’ve always said that our guidance and put a number out there, then that’s the commitment.

I think at the start of the year, you take the numbers we’ve got and that’s the commitment and what we are going to deliver.

Frank Mitsch - BB&T Capital Markets

All right, terrific. Congratulations on a good year.


Our next question comes from the line of Jeff Zekauskas with J.P. Morgan.

Jeff Zekauskas - J.P. Morgan

Good morning. When you estimate your -- when you did your forecasts for 2008, what are the domestic corn acres that you are assuming and soy acres that you are assuming?

Hugh Grant

Our best guess, Jeff, and it kind of ties to the last question because whatever I give you is probably going to be wrong, but as we are looking at how 2008 unfolds, our guess is that there will be about 90 million acres of corn, about 65 million acres of soybeans, and the cotton will be about flat year on year.

But to the first question in drought and Frank’s question on guidance, the reality on our performance is going to be an awful lot less driven on is it 90 million acres, is it 92, is it 93? We don’t lose sleep on that because whatever number we place the bets on is probably going to be wrong.

The piece that we spend an enormous amount of time working on is share, and irrespective of the marginal growth between 90 and 92 or 94, how do we excavate share in that market and how do we serve farmers? Because if we offer up the absolute best-performing germ plasm, then regardless of the size of the pie, we are going to grow our share disproportionately.

But that’s our crystal ball as of today.

Terrell K. Crews

In addition to share, our trait penetration, so we focus on share and trait penetration more than we do no acreage. Those are the assumptions we have included.

Jeff Zekauskas - J.P. Morgan

Thank you very much.


Our next question comes from the line of Kevin McCarthy with Bank of America.

Kevin W. McCarthy - Bank of America

Good morning. Hugh, based on the field trials that you’ve conducted for the SmartStax, eight-way stacked product, what kind of yield differential are you seeing relative to your triple stack in the same germ plasm?

Hugh Grant

That’s a question I’ve been asking as well, Kevin. We don’t have that data rolled up yet. We have 56 trials that are coming off the field. I guess the majority of them are now harvested but I personally haven’t seen the roll-up in that data yet, but that’s an important data point and I guess we will be able to give you a flavor of that towards the back-end of this year, but I don’t know yet.

Kevin W. McCarthy - Bank of America

Okay, a couple of questions on Brazil, if I may, one on corn and one on soy. As it relates to corn, can you talk about your strategy to stabilize market share with the Agroeste acquisition? And then on the soy side, it looks like your penetration of 50% is tracking a bit more than your 45% target, so does that allow for some price increases or other mechanisms to increase your revenues there to close the gap with the U.S. in soy?

Hugh Grant

I’ll let Terry talk about soy but we are not thinking about pricing, but I’ll let him talk about the 45 versus 50.

In corn, this year will be a stabilization year. Agroeste is a great acquisition. I am very, very pleased with the Agroeste deal. It gives us strength in the south where we were a bit weaker and we will be mining that germ plasm, as we’ve done all our other seed acquisitions. We’ll be mining that germ plasm and then blowing it across our base, so it represents strength in the south, a 10 share point increment, but also it gives us the opportunity in mining a new gene pool across the broader base or germ plasm.

So nothing much more than blocking and tackling in this first year but we are good at these corn acquisitions and we know the recipe, so that will be the first year. And then in the next two or three years, we will start to see upgrades in the portfolio.

And then on soy --

Terrell K. Crews

Soy, we are obviously very pleased to see the penetration move to 50% and we are looking forward to that growing and reaching our objectives by the end of the decade, to be fully penetrated in soybeans in Brazil.

At this point right now though, we aren’t considering a price move. We will look at that as we work through this season.

Kevin W. McCarthy - Bank of America

Thanks very much.


For our next question, we’ll go to the line of Mike Judd with Greenwich Consultants.

Mike Judd - Greenwich Consultants

Good morning. A question on Roundup. Could you talk a little bit about what the capacity utilization is in that business? And in terms of CapEx, just as follow-up, could you provide a little bit more detail on where you are going to be spending the CapEx in ’08 please?

Terrell K. Crews

Well, utilization in Roundup, we’ve obviously seen that business grow from a volume standpoint, so we run at a very strong utilization of that facility there. Relative to -- both facilities, both the one we have in the States and the one we have in Brazil.

Relative to capital expenditures, it’s really largely driven toward corn facilities, corn facilities in the U.S. and also outside the U.S. and some other markets where we’ve seen our share growth and we’ve needed to meet volume demand, so the big headline around our capital spending is all around corn.

Mike Judd - Greenwich Consultants

Do you expect to need to build additional Roundup capacity, and if so, when would you do that and how much would that cost?

Terrell K. Crews

I would begin with two things; one is first of all, our team has done a really great job of getting more gallons out of that facility, out of both facilities, so we are really pleased with what our manufacturing organization has been able to do through de-bottlenecking and modest capital spending. They’ve done a nice job.

If we had to make another move on capacity in glyphosate, it would not be in the order of magnitude we saw a number of years ago when we built the Brazilian facility. We’ll continue to look at ways to streamline our existing operations and modify them to get additional capacity out of the existing units. I still don’t see a [greenfield site] in Roundup coming.

Mike Judd - Greenwich Consultants

Thanks for the help.


Next we’ll go to the line of P.J. Juvekar with Citigroup.

P.J. Juvekar - Citigroup

Good morning. Now that you have strong franchises in corn, soy, and cotton, are you agnostic to the acreage shift among all these crops?

Hugh Grant

Agnostic, yeah I -- I mean, bigger acreages are always a nice thing and there’s a tremendous amount of optimism in the farm right now.

We’ve got a really nice balance because of the corn, cotton, soy trade-off and if you look at the trade-offs that are happening within those, they are largely happening within those three. But as I said earlier, the way the algebra works for us is that it is continuing to grow share and drive some penetration within that new share, so corn is always more attractive for us than soybeans right now because of the technology load there. But there is nothing beats strong share growth and differential technology penetration either.

Terrell K. Crews

Relative to crops, corn might be about $3 better an acre for us. Cotton and corn are almost a wash.

P.J. Juvekar - Citigroup

And you sold 18 million acres of triple-stack corn in ’07, and you were sold out. What do you think was the underlying demand if all the seed was available? Meaning, what was the major [factors] did you not bill in?

Terrell K. Crews

That’s a difficult question because we wouldn’t really know that final answer unless we had the volume. It certainly was more than what we had available, and we’ve talked about having up to 50% of our product available this year in triple stack, so that probably points to the direction of where we think the market can go.

P.J. Juvekar - Citigroup

And then I want to go back to this loss of corn share in Brazil. Is it a germ plasm issue that you don’t have the best germ plasm currently in Brazil? What is the reason for market share loss?

Hugh Grant

Yes, it’s germ plasm. It’s germ plasm and I think the Agroeste -- to the earlier question, the reason I’m delighted by the Agroeste acquisition is it strengthens out position in the south where we were weaker, but it also gives us tremendous leverage on taking that germ plasm and moving across the entire platform.

So I am very pleased with the acquisition. I think at some point, and I don’t know what, but at some point Brazilian germ plasm in the offering has to improve because it is still out of kilter with what we see in the North American markets.

So there is tremendous -- the optimist would say there is tremendous room for improvement.

P.J. Juvekar - Citigroup

And is that over a couple of years?

Hugh Grant

Probably two or three years, I would guess. Because we will do it at the start. We are using their existing offering and then longer term, we’ll introduce and breed from a new gene pool and that will take a bit longer.

P.J. Juvekar - Citigroup

Thank you.


The following question comes from the line of Robert Koort with Goldman Sachs.

Robert Koort - Goldman Sachs

Thanks very much. Good morning. Usually this is the time of the year when you guys get to present some pretty bullish slides about your yield comparisons to the competition and I’m just wondering, from your field work this year, what those trends suggest relative to some of the gains you’ve made in past years, particularly in corn and I guess, to a lesser extent, if you are seeing anything in soybeans in terms of catching up on yield.

Hugh Grant

Bob, it’s still early so I’ll give you an idea of how early it was; I sat out on a combine last Saturday with a grower over in Illinois and crunched my way through a few acres with him before breakfast, so it’s a ways to go yet. We’ll, sometime between the investor meeting and the top of the year, we’ll give you, rather than the anecdotes of a Scotsman, we’ll give you statistical data.

The feedback that we are getting this year in terms of heads to heads, within the same farm, we are getting a very encouraging data and that’s what drives order patterns and literally they are phoning in from the combines and that seed starts to be trucked. It’s Thanksgiving, we’ve got a real clean idea of what the order books are, so it’s still a shade early but I am optimistic.

Robert Koort - Goldman Sachs

I was wondering if you could talk -- you don’t normally talk about losing market share. I am trying to recalibrate your cotton position as you go forward. Can you give a little more detail on why Delta lost share? And then, are you providing your competitor with the sale of Stoneville some positive momentum in share there that might take a while to arrest?

Hugh Grant

So the second piece first, yeah, we are providing our competitor with some momentum, so Stoneville had a good year and it was driven by germ plasm and it was driven by second generation double stacks, so Bollgard II [by flex].

In a funny kind of way, Bob, it proves the hypothesis. It empirically proves it because we sold a company that we’d worked on and, albeit small, it drove share gain. I think with Delta and Pine Land that we are out of position in the technology, so we said this morning mid-teens in terms of penetration of second generation versus 41, so I think getting the right technology into some of their leading germ plasm, we can -- I should never say easy but we can turn this around in the next couple of years.

Robert Koort - Goldman Sachs

Great. Thanks a bunch.


Next we’ll go to the line of Lawrence Alexander with Jefferies.

Lawrence Alexander - Jefferies & Company

Good morning. Would you mind giving some more detail on the drop in the profit outlook for the selective herbicides and Posilac? And in particular, how much of that is due to Posilac and the outlook over the next three to four years?

Terrell K. Crews

The drop in the selective chemistry business is driven largely by increased penetration of Roundup ready corn, so success in our Roundup ready corn franchise just puts the pressure on our selective chemistries, which are largely to the corn market. So we see some decline continuing in the selective chemistry business.

In the second part of the ag productivity segment where we expect to see some decline is in Posilac, our supplement for milk where we’ve seen some pressure in the dairy business on that product, so the combination of the two are where we are expecting to see other ag productivity declines in gross profit.

Lawrence Alexander - Jefferies & Company

But in terms of the relative magnitude of the two, is it roughly evenly flat?

Terrell K. Crews

We haven’t really discussed at that level of it but both products are contributing to that decline.

Lawrence Alexander - Jefferies & Company

Thank you.


For our next question, we’ll go to the line of Mark Gulley with Soleil Securities.

Mark R. Gulley - Soleil Securities

Good morning. I want to go back to that question amongst the three key row crops, corn, soy and cotton. Terry, can you give me a feel, give us a feel for the roughly gross profit per acre for the products that you sell, differences, if you will, amongst those crops so we can take a look and see how a bias towards corn might affect you?

Terrell K. Crews

It is a -- it depends obviously on the trait penetration, so it would be more complex than to talk to those the same with those changes would be. I think the underlying assumption should be that if an acre goes from corn to soy, then it is on average roughly $3 less profitability for us on that shift. If it goes from corn to cotton, it’s actually neutral to slightly positive, so it’s a little bit better in cotton but it depends in cotton on whether we’ve got a double-double -- in others words, two second generation traits in the seed.

But that’s the way we view the business. But I just would come back to re-emphasize what we said earlier in the call; at this point right now, when we are thinking about 2008 and where we are going to end up, it is not focused so much on where that acreage goes and I don’t believe that would be a reason for us calling out success or failure at some point in the future.

Success is going to look like a greater share penetration in corn and greater penetration of triple stacks in corn, and solidifying our soy and cotton businesses, which we need to do this year.

Mark R. Gulley - Soleil Securities

And then as a follow-up, when Bret gave that talk recently about tripling his trade penetration internationally, can you provide a timeframe over which that tripling could occur?

Terrell K. Crews

We still need to look through what that is going to be but there is really some encouraging signs that we’ve seen. We’ve talked a lot about Brazil corn today and to have approval in Brazil corn and seeing people serious about the opportunity for corn in Brazil is encouraging.

There’s roughly 25 million acres or so of corn in Brazil, which now we can begin to address similar size in Europe and we said, we’ve talked about hundreds of thousands, not millions, of acres of trait penetration there, but it’s certainly encouraging signs and we are anxious to see how this next season goes in those markets but the objective is that the total market opportunity could grow to those kinds of levels by the end of this decade, early part of the next decade.

Mark R. Gulley - Soleil Securities

Okay, thanks for the clarification. I appreciate it.

Scarlett Lee Foster

Sean, I would like to -- we are going to run over just a few minutes, but if I could take time for two more questions, please.


Absolutely, and our next question comes from the line of Donald Carson with Merrill Lynch.

Donald Carson - Merrill Lynch

Thank you. Hugh, you mentioned that you are focused on share and trait penetration in corn, and so two questions as a result of that; your gains in share, do you think they are more due to your yield advantage versus your competitors, or your greater trait availability?

On that subject of trait availability on slide 8 you showed DEKALB going from 42% to triple stack in ’07 to 50% plus in 2008. I am just wondering how big that plus is, because I know you went from 21% to 42% ’06 to ’07, and in talking to people at your farm progress show, I got the impression that you could be as high as 70%, 75% on triple stack in 2008 at DEKALB.

I wonder if you could just quantify some of those plus signs on that slide.

Hugh Grant

Thank you for the question, Don. So the first one is, is it traits or is it yield? It’s yield. It’s absolutely yield and I can tell you, when you sit in the -- you know, the nice thing about being on a farm versus a farm progress show is those combines run around and when you sit in those combines and you watch that yield monitor and you look at the difference that good germ plasm makes, it’s a very compelling financial argument.

This isn’t -- the primary driver in this is quality of germ plasm and the yield that unlocks, and whether that corn is coming in at $3, $3.5, or $4 a bushel, every extra bushel makes a big, big difference.

So the yield is the big piece but the way I always think about it is the traits that are loaded onto that platform protect or unlock that yield, so it’s one thing having the inherent yield capacity. It’s another thing protecting it from weeds and hungry bugs. But it is the genetics that makes the difference.

So that’s the first one, and your second one on how big is the plus, we’ll have to wait and see. I think there is going to be healthy demand, Don and by the time that we get a chance to look at the order books and see once they get off the combines and start looking at how much they actually brought in this year, I think it is going to really heavily influence the shape of those fall order books. So I will reserve judgment on how big the plus is, if that’s okay.

Donald Carson - Merrill Lynch

On that genetic gain, what -- I mean, you are targeting a 1% to 2% increase in the U.S. corn seed share. What kind of yield advantage do you think you need to meet that at a minimum and what keeps you maybe going at the 3% to 4% point gains that you’ve seen for the last few years?

Hugh Grant

I wouldn’t speculate on it but here’s a way of looking at it; we announced several years ago that we were going to grow at one to two share points between now, between three years ago and the turn of the decade, and the question that I got repeatedly when we declared that was why are you sticking your neck out so far? Why are you anticipating that kind of share growth when nobody has ever done it before?

It was based -- it’s like everything else that we do, it was based on a plan, it was a commitment, it wasn’t an aspiration, and it was driven by the genetic performance that we were seeing. Nobody ever anticipates that the corn would run up to $4 a bushel, but we knew that we were going to bring a lot more bushels in, so rather than going through the algebra of X-bushels equals a bigger share gain, I would rather wait and see what the yield advantage is that we’ve got off the combines this year and talk about that against real data in the back end of the year, Don.

But I am optimistic based on what I am hearing from the field and the conversations that I am having with reps and more importantly with our customers, our growers.

Donald Carson - Merrill Lynch

Thank you.

Scarlett Lee Foster

Sean, if we could take the last question, please.


Certainly. Our final question comes from the line of Vincent Andrews with Morgan Stanley.

Vincent Andrews - Morgan Stanley

Good morning, everyone. When you look at the USDA yield expectation this year for corn, it is going to go from 150 to at least to 156 at present, and some of the people I talked to in the field think it can go higher than that, and when you think about the fact that the soybean yield is going to more or less be flat in the same kind of, and the weather was okay, does that yield improvement really cement to the farmer how powerful overall biotech is? Let’s not even get into who has the yield advantage and what, and do you think that that’s kind of a breaking point, another breaking point in terms of farmer acceptance of biotech in their anticipated planting for this coming season?

Hugh Grant

I think it absolutely does. I think it absolutely does and it is anecdotal at this stage but if you think about it, the country brought in the biggest harvest they’ve seen two or three years ago. The second biggest harvest they’ve seen was in one of the driest years they’ve ever seen and I tell you, anybody I talk to links that back to better root structures, better uptake, and protecting the yield from bug attack.

If you look at this year, you’re right; the early reads 155 bushels on a bunch more acres, so we are going to see the biggest -- I would guess one of the biggest corn harvests that we’ve seen this year.

So I think a big piece of it is driven by biotech, absolutely.

Vincent Andrews - Morgan Stanley

Okay. Thank you very much, everyone.

Hugh Grant

Thank you. Thanks for the question. Maybe just -- I know we’ve run over a little bit and we’ve got a lot of people on the call this morning, so let me just wrap this and begin by thanking you for joining us this morning, for your support as we look at a promising 2008.

As I mentioned earlier, as we speak, farmers around the world, not just in the U.S., from corn to tomatoes, they are deciding what kind of market share growth that we can anticipate in 2008. As we speak today, farmers are deciding on what kind of trait package will give them the best protection for the yield that is already programmed into the seed.

So when we speak in the January timeframe, we’ll be sitting down at that time to make our production bets in 2009 and from there, from 2009, we’ll be able to reach out and touch the launch of Roundup Ready2Yield and, excitingly, the launch of SmartStax.

I don’t think it’s a leap of faith then to see why, when we gather for our investor day in St. Louis, that we can look out to 2012 and, as we discussed in the call, the potential advent of drought tolerance.

So our willingness to speak openly with you about what we can do and the challenges that we have ahead for the next five years speaks to our confidence in our growth, our leadership and our pipeline.

It is our job to gain your confidence that the most significant growth from Monsanto is yet to come.

Thanks again for joining us today and I look forward to seeing many of you here in St. Louis. All the very best. Thank you.


Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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