Section I: Management Presentation
Greetings, and welcome to the fourth quarter 2013 Monsanto Company earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Bryan Hurley, Investor Relations lead for Monsanto. Thank you, Mr. Hurley. You may begin.
Bryan Hurley – IR
Thanks a lot, Kevin. And good morning to everyone. Thanks for joining this earnings update and acquisition announcement. I’m joined this morning by Hugh Grant, our chairman and CEO; Brett Begemann, our president and chief commercial officer; Pierre Courduroux, our CFO, and additionally Rob Fraley, our chief technology officer who will join us for the Q&A period. Also joining me from the IR team are Ashley Wissmann, Tim Boeker and Manny Cruz.
With our announcement this morning that we signed a definitive agreement to acquire The Climate Corporation and with the usual focus on our outlook for next year, our emphasis this morning will be laying out our vision for how we plan on driving an additional leg of long-term growth. Before we do that, let me start with the logistics. This call is being webcast, and you can access the webcast and supporting slides, including slides and information about today’s acquisition announcement on monsanto.com. The replay will also be available at that address.
We’ve provided you today with EPS measures on both a GAAP and on an ongoing business basis. Where we refer to non-GAAP financial measures, we reconcile to the GAAP measures in the slides and in the press release, both of which are on the website. This call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risk and uncertainty, the company’s actual performance and results may vary in a material way from those expressed or implied in any forward-looking statements. A description of the factors that may cause such a variance is included in the safe harbor language in our most recent 10-K and today’s press release.
We’ll move quickly to the heart of this strategic discussion and as we do, let me underscore a very brief anchor from our year-end results on slide 14 in the financial section of the slides. We closed out fiscal year 2013 near the high end of our guidance with ongoing EPS of $4.56 and nearly $2 billion in free cash flow. Those results represent greater than 20% ongoing earnings growth and closes out our third consecutive year of strong growth. It’s also a reflection of the strength in our global portfolio as the diversity of our business drivers achieve that growth even against greater than usual variability in fiscal year 2013. Those portfolio drivers continue to have a key role in our outlook for fiscal year ‘14.
So with that, let me hand it to Hugh to bring this together in our strategic view. Hugh?
Hugh Grant – Chairman and CEO
Thank you, Bryan and good morning to everybody on the line. At the risk of stating the obvious, this isn’t a typical earnings call for Monsanto. We’re talking about the outlook for another strong year, a breakthrough addition to our company, and how the next step on our integrated farming efforts establishes a platform for the next decade.
So here is my headlines for today. Number one, as our confidence in the core business, after three straight years of strong performance, we’re on track for continued growth. If you set aside our acquisition for a moment, 2014 is a year where we’d be talking again about growth at our historical rates. That will still show through in our operational growth for the year. That performance gives us the ability to invest in breakthrough new areas that extend our leadership and deliver the next meaningful tool for our farmer customers.
Number two, our announcement today to acquire The Climate Corporation increases our confidence that our continued development of Integrated Farming Systems or IFS can be a full-fledged transformational platform. The first wave of IFS revolves around a single product, but with what we’ve just assembled, we’re now talking about a true platform with tools that span from planting the seeds to many of the key variables that growers deal with throughout the growing season. Looking to the future, growers will need every available tool to produce more yields on the same acre.
Strategically, we believe we are putting the best-in-class analytical capability on the largest global agricultural footprint. The combination with Climate Corp unlocks new strategic opportunities and strengthens our growth rate over the next decade. It’s a significant use of cash that in one transaction we achieved an important leadership position that otherwise would require considerably more money and time to develop on our own.
For several years, we’ve talked about the convergence of biology and information and agriculture, that’s covered in slide six. We see today us fulfilling that potential. We now have the tools to make farming more precise. This helps farmers manage increasing variability and meet the increasing challenges of climate change. Look at the influence of weather. Nine of the 10 warmest years on record have occurred in the last decade. Farmers today are challenged to make key decisions for their farms in the face of increasingly volatile weather conditions. Because of this, we believe there’s real opportunity and value in working with farmers to manage the risks that affect them every year from planting to harvest.
We won’t do that single-handedly. It’s an opportunity that cuts across the industry and we will use an open source approach, like the one that we’ve used in the past with biotech traits. That means we’ll prioritize building this platform as a network across all seed companies, our retail partners, equipment leaders and input providers. This is a natural extension of our industry leadership and the same way that we invested in biotech and breeding, we believe the combination of biology and analytical capability on slide seven has that same transformational potential.
The Climate Corp isn’t from the traditional ag industry but their analytical capability and their immediate set of products set them apart in this emerging space. Importantly, they also become the integral piece of our full platform for us. That’s an important early mover advantage as we become a leader with Climate Corp in taking the big data capability used in other industries and making it relevant to agriculture. I have been able to see this technology first hand and I’m excited about what we can do to further drive yield. I’ve also felt the early palpable excitement that underlies the meetings as our science teams get together and discuss how powerful our combined capability can be to our farmer customers.
Here so we see this working start on slide eight. I think this will be most intuitive to farmers. They deal with variability every day. Every year they make approximately 40 key decisions on every single field, each interrelated and ultimately play out on the bottom line. They tell us they’re looking to use more of the data coming from the fields and their tractor cabs to improve their productivity and their profitability. The bottom line is many growers are already looking at this area. They recognize there’s opportunity there.
On the farms of tomorrow, we see farmers applying their data to drive nearly all of those 40 key decisions as they fine-tune dozens of variables with the same meter-by-meter precision that we see in FieldScripts today. And since this is a technology that doesn’t have the regulatory component involved in biotech or in chemistry, it moves more like the rapid cycle upgrades for computer software.
On slide nine, we show how we see that initial product portfolio shaping up for our farmer customers. The first thing that we’ll do is build on our FieldScripts by using Climate Corp’s data insight to make those prescriptions even more powerful by overlaying historic and real-time weather information, creating a better blueprint for planting. From there you add tools to help with planting through harvest as well as end-season spray recommendations for pest and disease control. These help growers make better decisions field by field. That builds on Climate Corp’s Total Weather Insurance, a tool that gives farmers a way to supplement conventional crop insurance using predictive analytics again for every field. This is also one of the first ways that Climate Corp monetized this capability, leveraging this analytical insight to allow insurers to underwrite supplemental insurance.
It’s also an important validation point as insurers have already put their dollars behind the science and the predictive power of these tools. These tools create value. If we use the example of cotton, we believe there is as many as 50 additional bushels per acre that can be unlocked through better applied data. We’ve seen this proven out in our current Ground Breakers program on slide 10. This year farmers planted 40,000 acres with our initial FieldScripts product. It’s early days but anecdotally, we’re seeing five to 10 bushel an acre yield advantage in line with our tests from last year.
It’s compelling validation that field-level data directly influences productivity. Our introductory placing for FieldScripts for 2014 is $10 an acre, reflecting a portion of the value that we believe we’re adding. And that becomes a good model for how we think about pricing and value across this technology platform. Just as we’ve done with our existing technology, we’ll price as a per acre fee based on the value added with each component as we share that total value with our farmers and retailers.
As we show on slide 11, in the next two to five years, Climate Corp expands and accelerates the initiatives that we started with IFS. And I expect this to be a classic example of more, better, faster. This elevates IFS as the clear new driver in our corn business as we expect to ramp up in the next few years, first in the U.S. before expanding globally and eventually across soybeans and other crops.
In the longer term, on slide 12, this rewrites the addressable market opportunity. Put simply, our business today under initial IFS concepts focused exclusively on where we have the seed and trait footprint. That’s about 400 million acres for corn, soybeans, and cotton. The opportunity of an expanded platform is that farmers can use the key elements regardless of the seed brands that they plant, including those outside the footprint of crops that we participate in today. Essentially then, this is a new macro opportunity of more than a billion acres.
And if you look at the collective opportunity across traditional precision agriculture and these end-season tools, we see a potential industry-wide opportunity of more than $20 billion in revenue. That’s a new compelling opportunity for our business and that’s also in areas where growers need the most help.
As exciting and as important as our work with Climate Corp is, it’s important to emphasize that we see this as a new layer on top of the existing opportunities in our base business, as seen on slide 15. What’s driven our success in the past three years is a strong business engine. Nothing has changed in our core business and there is no hesitation that the operational growth that we anticipated for fiscal year ‘14 still drives our business in the near term.
So in summary, we expect that core business is going to grow at mid-to-high-teens operational growth rate in fiscal year ‘14. On EPS level, we will absorb some of the embedded costs that flow through our financial statements this year as we bring Climate Corp into our business. That translates to an EPS guidance range of $5 to $5.20 after approximately $0.14 of total dilution related to the acquisition.
The clearest way to see the 2014 growth expectations is at the operational level. For clarity, we are providing the outlook and a couple of additional elements within our financial statements that Brett and Pierre will cover in more detail. But be in no doubt, we are not taking our eye off the ball on any of the factors that drive our growth in 2014. And Climate Corp will extend that growth in years to come.
I think that’s the perfect segue to Brett as he walks through more detail on how we stay focused on the growth that matters for this fiscal year. Brett?
Brett Begemann – President and Chief Commercial Officer
Thanks, Hugh and good morning to everyone on the line. Before I jump to the operational view that Hugh mentioned, let me offer a quick perspective of how the opportunity with The Climate Corporation falls into our business view. First, this is exciting because we’ll have something we’ll take to our farmer customers to start getting them the tools I believe they’ve been asking the industry for.
As I’ve talked to farmers, they know that the next increment of yield is attainable on their farm. And they are looking for help in leveraging the massive amount of data they generate, so they can unlock it to make their farming decisions more precise. As we plan to add The Climate Corporation, we have a way to do that.
Second, as Hugh said, this is expected to take our offering from being a product to a true platform. We’ll plan to offer farmers a portfolio that brings something meaningful to all aspects of their operation. We’ll look to leverage our partnerships with retailers, equipment companies and other input providers to maximize our ability to make this a truly integrated platform for farmers. This is an opportunity that layers on the foundation we have in a growing global business on slide 16. So maintaining a focus on delivering the business in the near term is critical, as it is the springboard for this next round of growth.
Here is how I see the keys in 2014. In the last three years, our business engine has emerged as a balanced, global and growing operation. In the last year, we’ve removed several key uncertainties, putting our DuPont agreement in place and obtaining several key regulatory approvals and at the same time, we opened new opportunities, the most notable of which takes off with the launch of Intacta this year. The things we expect to drive our business in 2014 are fundamental to who we are. It’s about pricing uplift as we upgrade our portfolio. It’s about the mix benefit we see with technology upgrades. It’s about an increasing global opportunity and it’s about our ability to grow volumes.
As Hugh said, given the acquisition’s dilution on the bottom line, a useful way to see this growth prove out will be on the operational lines of the P&L. And as I’ve worked with our teams, I’ve emphasized one metric in particular – margin expansion. We expect that to play out in the seed business as we expect to see margins reaccelerating across seeds and traits as we hit our growth pattern.
Given today’s longer discussion on our acquisition, let me focus on the quick list of the metrics and milestones that matter in 2014. Again this year, the opportunity begins with the corn portfolio upgrade on slide 17. We’ll upgrade our corn portfolio in every major geography with a steady stream of new, higher yielding products we expect to drive consistent 5% to 10% price mix uplift.
Over the past several years, we’ve been consistent in our upgrades in pricing, and that approach has resonated well with our farmer customers. As we look at this year’s pricing cycle, overall commodity prices have come down from previous peaks, but we’ve rolled out these upgrades in pricing with the same consistency for the Northern Hemisphere season, which is a major proof point and early validation of our line of sight.
If I move to slide 18, that same upgrade cycle holds for our corn trait penetration where we’re still growing in the more than 150 million corn acres in the Americas. In Latin America, the upgrades in both Brazil and Argentina are most pronounced as we project those take another major step in the portfolio. And despite some shifting in corn acre expectations for the first season in Latin America, our trait penetration is on plan and helps drive positive financial contribution even with potentially lower acres. That opportunity is book-ended by expanding volume opportunity in key corn regions.
The best example of that is on slide 19 with Eastern Europe where we continue to see significant opportunity as our volume growth is moving even faster than a growing total market. As an investment in our corn growth and just as importantly as a signal of our confidence in that growth, we plan to increase our CapEx spending this year to build out seed capacity in several key corn growing geographies.
2014 also starts what we expect as the re-acceleration of soybeans as we begin what I’d call the ‘Decade of the Soybean’ on slide 20. In the U.S., the deal we struck with DuPont rewrites the landscape, as we are effectively able to reach a 100% of the market opportunity for Roundup Ready 2 Yield. And in Latin America, we’re at the front edge of an even more significant upgrade as this year’s launch of Intacta takes the number of royalty bearing acres from effectively zero to a market opportunity of more than 100 million acres. That begins with Intacta where much of the seed is already in place for this month’s initial planting, supporting our largest soybean trait launch ever with around 3 million acres expected this year. This year, our dicamba-tolerant platform, Roundup Ready Xtend, also enters groundbreakers. So we are on the leading edge of our next blockbuster commercial platform that will be the next upgrade of this soybean portfolio.
From there, our look would broaden to the overall portfolio, and in particular, the ag productivity business. We now have strong visibility into the year and into the ongoing market conditions for Roundup, where the strength in the overall business is carried from last year. So going into 2014, we anticipate the overall ag productivity business with a steady to stronger contribution, again providing a level of confidence to another key portfolio element.
When we look back on 2014, a year from now, these are clearly the determining factors in our ability to deliver that reliable growth we see from our business engine. And as I wrap it up, let me underscore two points. First, this is a year where we are talking about one of the strongest operational growth outlooks we’ve had in recent memory. We expect that will come through in our margin and our operational growth, and it’s a reflection of what I see as a broader, more reliable global portfolio.
And then, I see our operational growth in 2014 as a springboard. I’ve visited The Climate Corporation and I’ve spent time with the team. Like Hugh, I’m excited that we have something transformational as we layer our IFS platform on top of our core growth.
With that, let me turn it over to Pierre to walk through how all of this comes together in the financials. Pierre?
Pierre Courduroux – SVP and CFO
Thanks, Brett and good morning to everyone. Before I go any deeper into the financial view and our business outlook for the year, let me offer a quick anchor point on the key financial metrics related to The Climate Corp acquisition. As Hugh said, we expect this deal to broaden our IFS platform, essentially moving up opportunity and our plan, and building a future growth platform.
With an acquisition of this size, the financial opportunity is important, and if we’re able to realize our accelerated plans for the IFS growth, Climate Corp could contribute to our earnings as early as in two years. I’ll cover the near-term financial impacts in more detail. But based on the opportunity Hugh scoped out we see this as a powerful investment that supports our continued growth.
As we think about that growth and our financial, here is my summary. First, we ended fiscal year ‘13 with earnings near the high end of our most updated guidance, which punctuates another year of strong growth. This demonstrates that our portfolio came together to deliver in a year with more than the typical variability and it clearly defines our growth path for 2014.
Second, our guidance reflects the business momentum and I believe that the most useful way to see it is through the operational financial metrics, specifically for gross profit, gross margins and EBITDA. This is why we have expanded our guidance of those metrics of fiscal year ’14, as we think it’s important to track and demonstrate the performance.