Monsanto Company (NYSE:MON) Q4 2013 Earnings Conference Call Transcript

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.

Finally, we also ended the year at the high end of our free cash flow guidance, generating close to $2 billion in free cash. In the past year, I’ve talked about how we can use that cash generation to fund growth and be more aggressive in returning some of the value we create to our owners. And we’ve done just that and are already seeing the first benefit as our average share count has begun to come down and as a result of our buyback programs. And while returning more cash to our shareowners, we’re using our strong cash generation and our solid balance sheet to make a growth investment in The Climate Corp acquisition.

Brett described the operational growth we anticipate. Let me tell you how I look at measuring our performance in the financials, as shown on slide 21. First, we have to move up the P&L to get a clear read of the business performance outside acquisition dilution. And the first place to look at is the gross profit line where we anticipate total company gross profit to be in the range of $8.4 billion to $8.7 billion, representing double-digit year-over-year growth. And the biggest driver of that GP line is the seeds and genomics segment where we expect mid-teens growth in fiscal year ‘14.

A key factor in this growth is margin expansion, and I expect the historical margin expansion we are used to seeing will return. In fact, we anticipate three points to four points of margin improvements across the seeds and genomics segment. The growth engine is one that we are most familiar with and it is our corn business. With the core volume growth and price lift that we plan for and some of the benefits we anticipate from COGS, I expect a rebound in margins in the range of three points. We also anticipate a strong rebound in soybeans as we had the new royalty stream from DuPont in the U.S. and as the early Intacta revenue becomes a positive contributor following a year of effectively no South American soybean contribution. Based on those, I expect the total improvement in soybean margin of six points to eight points for the full year.

Ultimately at the consolidated level, we expect all of these to result in mid to high-teens growth in EBITDA, which clearly demonstrates the benefit of the margin improvements coming out of our business. That business growth flows through to bottom line EPS but will be reduced somewhat as we absorb the embedded dilution related to The Climate Corp acquisition in 2014.

Notably, there will be several upfront and acquisition-related charges that flow through various lines in the financial statements, split among amortization costs, assumed operating expenses, financing and employee retention programs. That is expected to translate into EPS guidance of $5 to $5.20 after approximately $0.14 of total dilution related to the acquisition. Excluding that dilution, our growth rate would have been right at the typical mid-teens range.

Part of the confidence we have in this overall business growth comes directly out of our planning process. So it helps to identify some of the key planning assumptions that underpin our guidance. It is too early to make definitive call on any full year factors, but within the range of assumptions we are considering, we are monitoring the potential for lesser U.S. corn acres this year and the potential for greater volatility in currency outside of the U.S. But we do balance these against the benefit we anticipate as we see corn cost of goods normalize after a significant 2013 headwind.

As we consider the outlook for the year and as we have seen some shifting in earnings patterns over the past few years, it is worth outlining the outlook for the first quarter, on slide 22. Looking at this year, I expect our Q1 to be in the same EPS range to slightly up from last year. We expect the strategic factors that reinforce our overall growth, including trait mix upgrades in Latin America and the early contribution from Intacta will continue to positively impact our first quarter. Those will come along with the expected continued strength in ag productivity as that will also be a positive driver. But this year, we won’t benefit from the positive timing associated with last year’s early U.S. season and the quarter is also expected to include the effect of the widely-recognized decrease in summer acres in Latin America as well as lower acres and some timing effects related to cotton in Australia.

The last piece of the financial outlook I want to cover today is our cash deployment strategy, on slide 23. I articulated earlier in the year that we are primarily focused on funding growth in the business with CapEx and M&A that we aim at keeping the solid balance sheet, but that we are ready to use any additional cash to more aggressively fund our buyback and dividend programs.

As we look at that cash strategy, I want to first highlight our fiscal year ‘13 end points. With total free cash flow at near $2 billion we hit the high end of our guidance range and we nearly used 100% of this free cash flow to return cash to shareowners through buybacks and dividends, which I see as a key proof points of that philosophy in action. In fact, in the fourth quarter we spent more than $0.5 billion on share buybacks making that the largest single quarter for buybacks ever.

Shifting into 2014, I believe the full elements of our approach will be even more apparent. We continue to expect to generate strong free cash flow in the range of $600 million to $800 million, which takes into account the approximately $930 million allocated to The Climate Corp acquisition and a CapEx plan of $1 billion to $1.2 billion.

Within that bottom line figure there are a couple of major priorities. First, we’ll continue to invest in the business to support our global growth opportunities. This year we are budgeting more for CapEx and just as we did several years ago when we built our seed production capacity in the U.S. ahead of our recent growth, we will primarily deploy our capital to further build out our seed production capability. That will allow us to support the volume growth trends we have in core markets like the U.S. and rapidly expanding opportunities like Latin America and Eastern Europe. These are investments that we evaluate very carefully and that offer some of the highest returns in our portfolio.

You see that same growth focus in our investment in Climate Corp. This is the most significant M&A we’ve had in several years and it is one that has the potential to be transformational in the growth it unlocks by making farming more precise. Practically, we will fund this acquisition with cash on hand and debt as we use the capacity of our balance sheet where we can take advantage of a favorable debt market.

Lastly, we’ll build on the start we made in 2013 on share buybacks and dividends. We expect this to start to reduce share count for 2014. And in fact, we have early visibility as the share count is already lower entering the fiscal year than it was at the beginning of 2013. Regarding dividends, we announced in August that we increased the dividend by 15%. I see this as a continuing priority as we look to align our dividend opportunity with our business growth.

As we wrap up, let me emphasize that we are very focused on growth that comes on the business side in the form of the reliable funds we expect through our operational growth. But it also comes through as we put our cash to work by investing in new capacity in the business and expanding our platform with today’s acquisition. And that growth is underpinned by a strong business. It is a business that is more diversified and with a broader portfolio than ever. But it is also a business that we expect will continue to generate significant cash to enable us to fund further growth and further reward our owners.

Thanks for your time. And with that, let me turn it back to Bryan for the Q&A period.

Bryan Hurley – IR

Thanks, Pierre. With that, we’d now like to open the call for questions and we have Hugh, Brett, Pierre and Rob Fraley available for this Q&A period. As we typically do, I will ask that you please hold your questions to one per person so that we can take questions from as many people as possible. You’re always welcome to rejoin that queue for a follow-up question.

With that, Kevin, I think we’re ready to take any questions from the line.

Section II: Q&A Session

 

Operator

(Operator Instructions) Our first question today is coming from Chris Parkinson from Credit Suisse.

Chris Parkinson – Analyst, Credit Suisse

Just throughout the entire discussion here, can you add a little more color on how The Climate Corporation fits in your existing platform, particularly with FieldScripts? And then also how long it will take to develop the optimal input algorithms across all the various inputs you are looking at through your new and existing portfolios?

Hugh Grant – Chairman and CEO

Thanks for the question. So I’ll say a few words and turn the mike to Rob. The great thing about this acquisition is we see applicability immediately. So they are out there in the market today, they have a lot of the algorithms and the data modeling that we had looked at and literally in one step, we have an installed platform of big data as it applies to agriculture. We, as you rightly said with FieldScripts, we’ve got about 40,000 acres that’s been harvested right now and our preliminary focus is in corn. But we see with The Climate Corp acquisition, the ability to broaden our footprint into all other crops and then eventually in the crops that we’re not really in today. But I’ll let Rob say a few words on the agronomy of that.

Robert Fraley – EVP and Chief Technology Officer

Thanks, Hugh and yes we’re quite excited about today’s announcement. We’ve talked now for a couple of years about how the advances in biology and information technology are really creating a convergence, not only in the science of breeding and agronomy, but clearly in terms of how we think of that modeling growers decisions and the global outreach. And Hugh mentioned that a farmer makes about 40 key decisions, many of those decisions are very weather dependent. And importantly, this will accelerate our ability to add new scripts to our IFS platform and the other key element is the ability to move this internationally at a faster pace. So I see the building of capability and also the speed as the key drivers of this deal.

Operator

Our next today is coming from Robert Koort from Goldman Sachs.

Robert Koort – Analyst, Goldman Sachs

More questions on The Climate Corp, could you talk about how you arrived at the value for the company? Can you talk about the revenue base they have today or maybe the client base they have today?

Hugh Grant – Chairman and CEO

Yes, their revenue base is still small Bob, so they’re at the early stages of rolling out. There will be 1 million acres or so this year with our first products. Their first products have been some weather predictive and weather service models and also some insurance models that are iterative to act on a top up basis on top of the federal crop insurance program. So we see in corn at the beginning and of course, other crops over time, tremendous leverage on taking that weather data, unfolding those algorithms directly into our FieldScripts.

So just to remind people, FieldScripts this year is on a 40,000 acre Ground Breaker program and with those – I think about 160 farms, we’ve transmitted scripts remotely on an iPad in the tractor cab. The iPad then sets the planter on a variable planting basis and we are harvesting those at the moment, harvest is late this year, but the early reads on that confirm our five to ten bushel projection and with Climate Corp., we see that projection strengthening over time.

Robert Koort – Analyst, Goldman Sachs

Maybe follow-up for Pierre, could you tell us how we should feather in the DuPont payments from a quarterly standpoint?

Pierre Courduroux – SVP and CFO

So the payment is going to be booked twice a year and will happen in the – the first payment is going to happen in the second quarter.

Operator

Our next question is coming from Don Carson from Susquehanna Financial Group.

Don Carson – Susquehanna Financial Group

Hugh, another question on FieldScripts. How should we think about the ramp up in both volume and value over the next few years? Obviously with seed your volume ramp up is determined by biology, what’s the driving factor to determine how many acres you can get on over the next few years? And you talked about this being a transformational platform, what do you ultimately see as the size of this business relative to some of your seed and trait platforms?

Hugh Grant – Chairman and CEO

Yes, Don, thanks for the question. So the ramp will be faster than traditional biology. We’re kind of a captive with our seed business on those first three years of slow takeoff. This is just making sure that we have the processing capability and get those algorithms refined and the deal [this more than] really puts the powder in the engine room on that. So from 40,000 acres, assuming that we have – that we have the results that we anticipate this year, this could be much larger, much faster. So I think it will be faster than our traditional seed ramp, Don.

And then from a potential point of view, I mentioned this morning that $20 billion opportunity. We will start with our own 400 million acre footprint. I think you can move from that very quickly to the billion acre opportunity and it takes you into crops where we’re not selling seed today. So I see this ultimately being a tool for growers where we can advise them in wheat and in rice and then crops, where we don’t – we don’t necessarily need to sell the seeds to have the advisory tool.

Robert Fraley – EVP and Chief Technology Officer

Yes, Don, this is Rob. Just again a couple of the far reaching impacts of this deal and one of things I really like about it is that it touches almost everything we do as a company. It’s really going to accelerate our breeding efforts and combining the genetic database with the field mapping will accelerate breeding. Clearly, bringing that weather-related predictive capability to the next set of the IFS scripts will make that more predictable. So as you know, we started out this year with our first script to address a population variability and it’s gone really well so far. We’ve been able to do the wireless transmission to growers. That’s been very seamless. A lot of the feedback has been how well that has worked. Extending that and refining those scripts and then adding the next set of FieldScripts for disease management and extending it to other crops becomes really our target.

The last thing I like about it is it really creates a very intimate relationship to able to provide more information to help growers. And this is one of the areas where I can tell you, as I talk to farmers literally around the world, the farmer interest in this and both the frustration they have with managing all the data and variables they see against the ease of execution of this platform is pretty exciting. So I expect the adoption to be pretty fast. We are working, as you know, and you’ve mentioned in the talk with both equipment companies and other players and retail partners, we clearly view this as — just as we did with the early days of the biotech, we’re going to look at the broad partnerships, broad licensing and an open approach to optimize the benefit of the technology to farmers.

Don Carson – Susquehanna Financial Group

And just a clarification on value. Compared to the $10 you are charging for growers next year, what is their initial charge on the million acres they’re going to be on?

Bryan Hurley – IR

Hey Don, this is Bryan. From a practical standpoint, they have a couple of different offerings. The first is the supplemental insurance offering that doesn’t quite work like that in our traditional sense. And then they have a suite of tools that we end up rolling out from here and those kind of touch all of those in-season factors that Rob was discussing.

Hugh Grant – Chairman and CEO

They’re still to launch some of the stuff, Don. So they haven’t rolled them on pricing some of this yet.

Operator

Our next question today is coming from Michael Cox from Piper Jaffray.

Michael Cox – Analyst, Piper Jaffray

I think we’ve gone through a lot of this Climate Corp. On the core business, could you talk a little bit about the earnings headwind you are seeing from lower summer corn acreage in Brazil in the first quarter, and if it’s embedded in your guidance? And then a follow-up on the Xtend soybean offering, could you talk about any sort of update on the environmental impact study?

Hugh Grant – Chairman and CEO

Michael, thanks for the questions. A quick word on corn. So a quick word on U.S., a quick word then on Latin America. So on the U.S., a late wet planting season and you saw as the season dragged on, some corn that just never got planted and we saw the evidence of that in our returns. So as late as, I guess, mid-September, September 16 or 17, the government announced that there was about 3.5 million acres in the Prevent Plant program. So those were acres that just never got planted, there was nothing went on that ground at all. So our book would say of the 97 million acres that’s theoretically there, it’s a number short of that, that 3.7 million, 3.6 million would certainly support that.

In Latin America, we are very pleased. Brett and I were there week before last, very pleased with the trait penetration. So the platforms have built out very, very nicely. You see growers down there watching, they are playing wait and see relative to the U.S. market. So last year, we had perfect market information, because the U.S. harvested so incredibly early. This year, harvests are running really late and the Brazilian and Argentinean growers are kind of playing the hedge at the moment, waiting to see what harvest looks like here. So early signs down there is acres are going to be crimped, they’re going to be a bit smaller. And then Intacta and EIS, Rob. Oh no Intacta, sorry, Xtend and EIS.

Robert Fraley – EVP and Chief Technology Officer

So Michael, the dicamba EIS, we’re working and providing the data and information. We expect that it will take about a year to complete that. Right now we are taking advantage of that time window in terms of our Ground Breakers program and providing additional opportunities for growers to see the technology. If everything goes well, 2015 becomes a possibility for the market launching.

Brett Begemann – President and Chief Commercial Officer

This is Brett. I’d just add one point to the South America situation. The thing that I track with my team is the big opportunity down there is trait penetration and trait intensification. And as I look at where we’re at with that part of our mix, we’re doing really well in South America. Regardless of where the acres land, I feel really good about how we’re stepping up again with our traits. In Brazil we’re looking at double going from 30% to 50% and in Argentina, we’re looking at triple going from 40% to 60% and regardless of where acres land, I feel really good about that.

And the other point that I would add and this is a point to the benefit of having a very strong global footprint in corn acres, as Hugh mentioned the South America farmers waiting to see what happens in North America and they may or may not know in times to make their planning decision down there for the first season. But we are strong in the first season, we are strong in the second season in South America. And if they don’t produce it down there, they will produce it in Eastern Europe and North America and we are strong in both of those markets. So throughout the year, I feel good we’ll be in the right place at the right time.

Operator

Our next question today is coming from Jeff Zekauskas from JPMorgan.

Jeff Zekauskas – Analyst, JPMorgan Securities

Just two questions of clarification. The first is that with the acquisition of Climate Corp., the $0.14 in dilution next year, is that operational dilution or it’s the combination of non-recurring acquisition charges plus operational losses? What’s the clean number? And then secondly, for Pierre, do you expect Monsanto’s average share count at the end of 2014 to be higher or lower than it is at the end of 2013?

Hugh Grant – Chairman and CEO

Thanks. So I’ll let Pierre pick up on this second piece. But let me just say a few words on guidance and how we think about it relative to this dilution, and then Pierre, maybe you can just do a bit color on the $0.14. I would say that we are – if you look at the business and it was a tough end to the year with weather conditions and the effect of planting and what we’re seeing that still washing through in harvest today. But despite we’re seeing strong growth where we expected in the business and as we look into ‘14 and even with the dilution we still see good growth opportunities. In fact, it’s no coincidence if you took the $0.14 and added it back, you got exactly our traditional growth rate of mid-to-high teens in that 13% to 17% range.

So I’ll let Pierre say a few words on dilution, but without the acquisition, we have been right on track with our mid-to-high teens growth rate. So Pierre maybe that as a backdrop and how you see the $0.14?

Pierre Courduroux – SVP and CFO

Yes, looking into the $0.14 and as I mentioned, you got a couple of things in the $0.14. So starting with the amortization of the acquisition itself, which would account for about a third of the $0.14, some financing costs and then a breakdown in between retention programs and operational losses as you mentioned in the first years. So that’s how we build this $0.14, it’s the aggregates of those four elements. So that was to address the first part of your question, which was regarding the $0.14.

The second part of your question, which was regarding share count. So starting the year, we are starting with a lower share count than we started the year in 2013. And as I mentioned, we have the intention to be still aggressive in our buybacks during the year. So although, we don’t forecast our share count for the year, I would expect on average that will be slightly lower than last year.

Operator

Our next question is coming from David Begleiter from Deutsche Bank.

David Begleiter – Analyst, Deutsche Bank Securities

Now that all the data is in, did you gain share in U.S. corn in 2013?

Hugh Grant – Chairman and CEO

Well, the problem is David, the data isn’t in, so harvest is — last year this time harvest was 70% to 80% done and this year, we’re 65%, I think last year, 20% — today, 25%. So my view in this is, acres are going to turn out smaller, just the gorgeous irony, the business we’re in with a couple quarters where the speculation was why can’t to be 100 million acres. And I think with the news on this 3.5 million acres, that wasn’t planted this year’s crop is going to be small. We feel good in the volume, we feel good on the branded sales. But I think it’s too early call, but Brett, I don’t know if you have anything you’d add to that.

Brett Begemann – President and Chief Commercial Officer

Yes, I just look at the U.S. and what the USDA says is 97 million planted acres and then the USDA says that there’s 3.5 million of Prevent Plant and those two numbers seem to contradict for me. So we don’t know where the acres are, but what I can tell you is, I feel really good about our global volume. I feel really good about our branded volumes in the U.S. And regardless of where the acres finally wash out to be and we probably won’t know that until close to the end of the year, I’m highly confident at this point, we feel real good about how we landed in the U.S. this year. But until those acres finalize, it’s pure speculation on what happen with share, but I can tell you that volume tells me, I feel real good and the returns don’t concern me, because I don’t believe there is 97 million acres out there. So we’ll be fine.

David Begleiter – Analyst, Deutsche Bank Securities

And just on this $20 billion opportunity, is there a margin we should think about – gross or EBIT margin — that could translate into earnings for you – for Monsanto down the road?

Hugh Grant – Chairman and CEO

Yes, margins are going to be very pure, because it’s information driven but Pierre, anything you could add?

Pierre Courduroux – SVP and CFO

It’s obviously fairly early, but the way to think about it is once again thinking about the potential for yield improvements that those technologies can bring to the farmers, and we’ve seen potentially up to 30% yield improvements. And if you apply the value share that we usually use with our farmer partners, that’s a way you can get to some kind of thinking about how we would price and that’s one of the ways you can get to the $20 billion to $25 billion opportunity that we were talking about. So it’s based on yield improvement, it’s based on value share and then you can run the equations.

Hugh Grant – Chairman and CEO

Maybe this helps. Maybe I would think about these almost like traits in terms of the margin opportunity and the pricing opportunity as we deliver the yields that Pierre talked about. The difference between these and traits is we think the development cycle and the regulatory cycle are going to be much, much faster. So these will come in iterative waves and they get smarter as time goes on. So I think you characterize them in a similar way, traits from a pricing and margin point of view, but to the earlier set of questions, I think the curve has the potential of running much faster.

Pierre Courduroux – SVP and CFO

And maybe the starting point for the thinking would be our FieldScript pricing around $10 an acre, which is the first generation of those products. So you can range it in between the $10 an acre from FieldScript and the potential 30% yield that we can reach.

Operator

Our next question today is coming from Vincent Andrews from Morgan Stanley.

Vincent Andrews – Analyst, Morgan Stanley

Maybe if we could just continue that last line of questioning below the GP line and just help us understand how does SG&A and R&D evolve with FieldScripts and with Climate? Do you need more people? Will R&D be going up? Will the mix of R&D spend be changing at all?

Robert Fraley – EVP and Chief Technology Officer

So we’re not anticipating significant change from the mix perspective. We definitely are going to invest to support our investment in The Climate Corporation, but we already had modeled in our plan also as part of the investment in IFS efforts. So it’s going to be the combination of those two that are going to drive our spending and it’s going to be on the people side and it’s going to be on some IT resources as well that we’ll have to invest into. But I am really expecting significant changes based on this position in terms of the evolutions of our ratios.

Hugh Grant – Chairman and CEO

And then Vincent, I’d just add, the last two years, Rob said was the last year – I think the last two years, we’ve been going back and changing our breeding and field programs to improve the feeds into IFS. So a lot of the R&D changes that we’ve made are already institutionalized. And then in my trips to meet The Climate Corp. team, I am blown away by the intellectual horsepower and the capacity of that group out there. They are a really, really fine – they are a fine team. They become the engine room for our algorithm developments and they will take a bunch of the mass and modeling in IFS and kick up to new level.

And from an SG&A and R&D point of view, I don’t see this as a phase shift, Vincent, I just see it as leveraging. We’re spending north of $1 billion generating piles of data every year. This just leverages the data that we have much more intelligently.

Vincent Andrews – Analyst, Morgan Stanley

And as a follow-up, you’ve done two acquisitions to get where you are today. Do you have everything you need or should we be expecting the other pieces of the puzzle to fall into place as we progress over the next year or so?

Hugh Grant – Chairman and CEO

Yes, so you’re right. These were two very important pieces. I don’t – at this magnitude, it’s not obvious what the next one is, but there will be continued build out in this platform. But I think between the equipment piece with precision ag, the data piece through The Climate Corp. and the biology it holds, that’s a pretty powerful triangle. And the next step for us before we see the next wave acquisitions, Vincent, is how we build out the platform with partners. So today, we’re very explicit.

We would anticipate partnerships with machinery manufacturers. We would see partnerships with people in the fungicide and insecticide and herbicide business. So the input providers, and in particular, we see tremendous opportunities through our retail network who are specialists in plant nutrition and fertilizer. And so there has always been this question on how do you access the farmer and what’s the quality of your distribution. I think this announcement today puts our distribution partners in the front row seats. So between those three pieces, that’s where I see the next level activity rather than the next big deal.

Operator

Our next question is coming from P.J. Juvekar from Citi.

P.J. Juvekar – Analyst, Citigroup

So as you did your due diligence for Climate Corp., can you explain us the competitive landscape and weather analytics, who the competition is and why did you decide to buy this company? Second question for Rob if I may. Rob, are you thinking that the seed growth will slow down globally in five to 10 years and you needed a new avenue of growth through this acquisition, is that how you are thinking about it?

Hugh Grant – Chairman and CEO

Thanks P.J., so I’ll steal some of this thunder. We don’t see that slowing down. And so why Climate Corp. and then the other question why $900 million plus and why now, we’ve been looking in the space for the last three years since we started the IFS work and Climate Corp. is the best that we’ve seen. They are unique in the agricultural space. In terms of the quality of the people, their early approaches to the market and their data analytics. So they represent a big data platform that’s already built for agriculture and as we looked at it, our conclusion was we would – if we try to replicate this, it would have cost us more, it would have taken us longer and we would have built it piece by piece.

So, I think it’s the entry ticket into a $20 billion market opportunity and it starts fast. And when you think about our footprint in seed today and you think what we could do with future partnerships and speed is really, really important in this. So that’s how we look to it and just we don’t see anybody who approaches their capability in the space and then Rob, P.J’s second question on looking out.

Robert Fraley – EVP and Chief Technology Officer

Yes and I think just to hammer home on that first piece. I think I haven’t been at the company for a long time and watching how the integration of breeding and biotechnology changed the seed business. I think what you will see play out here is that the integration of biology and information technology is going to do the same thing. I mentioned earlier this is already changing the way we breed our crops and that feedback loop in terms of selecting new seeds, new hybrids is going to be refined. I think effectively what this would do is increase the performance of our seeds by allowing that even more refined placement for growers to optimize yield.

And then as we talked about what you and Brett mentioned in the script, many of these algorithms will benefit other brands of seed, it will benefit seed with other crops that we are not participating in today as we can bring those weather-related algorithms. I can tell you again when I talk to growers, the concerns around climate variability, concerns around climate change, the effect that small changes in temperature have on everything from planting dates to disease outbreak and insects to plant nutrition are key and now the ability to model all those variables and provide growers with simple scripts that work, I think is really exciting.

Hugh Grant – Chairman and CEO

Thank you. So we are going to go a lot longer, there is still quite a few people patiently waiting in the queue. So we will go in lightening round now. So for my team here we’ll make the answers faster and we’ll try and crunch through a few more of these questions.

Operator

Our next question is coming from Laurence Alexander from Jefferies.

Laurence Alexander – Analyst, Jefferies & Co.

Just two quick clarifications. The Climate Corp business model was reported at about charging $30 per acre or about 3% of land value, but having a weather insurance risk of about 10 times better, are you abandoning that? And I guess the second part is the total capital invested was about $110 million. What are they doing differentially that you couldn’t match their business model with a smaller investment?

Hugh Grant – Chairman and CEO

So, we will not abandon the insurance products. We see opportunities for those products strengthening actually in the U.S but also in some of the international markets over time where there is very large growers and very little insurance offerings today. So we’ve been discreet but the feedback that we’ve had in Brazil and Argentina is there’s tremendous interest in these products. So we will maintain that but we see the opportunity is bigger than that insurance platform. And then Rob, I don’t know again really briefly, but I think that — the thing they had that we didn’t is extraordinary people and the existing algorithms.

Robert Fraley – EVP and Chief Technology Officer

Yes. Tremendous team, great analytic capability and a team that is directly focused on agriculture. And I think the key synergy that comes from this deal is combining their world-class analytics with our genetics and agronomic databases and that’s really what creates a absolutely special opportunity for the company.

Operator

Our next question today is coming from Mark Connelly from CLSA.

Mark Connelly – Analyst, CLSA

I wonder if we could switch gears and talk about Argentina. The news this morning in my mind is more consistent than inconsistent. And I’m just wondering as you think about the opportunities in Argentina, do you discount them much differently than you discount the opportunities in Brazil?

Hugh Grant – Chairman and CEO

No, I’m not sure the news you’re referring to this morning, but we see — if you are asking how do we see one opportunity versus other, in terms of the runway, we see them both equally.

Brett Begemann – President and Chief Commercial Officer

Okay. I think possibly — this is Brett — the news you’re referring to maybe is the seed plant delay in Argentina. And I look at that as just — that’s part of building new capacity and we have large scale capacity in Argentina that we can leverage as well as in Chile to help out there too. So we’re in good shape. As I look at Argentina, my focus is first on corn and driving our traits, I feel really, really good about that. We’ve got a great track record and great performance down there.

Second, I look at the most exciting opportunity that we have in the company and that’s Intacta. And I’ve worked with Argentina for a long, long time and never made a dime off of soybeans and we’re standing in front of the largest opportunity we’ve ever seen for soybeans in South America across that entire 100 million acre footprint. And I couldn’t be more excited about the fact that we’re ready to dip our toe back into Argentina and pursue that with a product that brings tremendous value to growers. And I would say enough value to growers that they lined up and helped us get the final approvals in China to make it happen. So they know it’s valuable and they want it and they’ve worked hard with us to put a system in place. So I’m very excited about the prospects in Argentina and Brazil.

Hugh Grant – Chairman and CEO

If it hadn’t been for Climate Corp, it would probably have been a bigger feature on the call today, but Brett and I delivered the first bag of Intacta seeds on our Brazilian farm in Northern Mato Grosso a couple weeks ago and then the pre-launch in Buenos Aires in Argentina. So I think the [starter guns] is going on both of those markets.

Operator

Our next question is coming from Tim Tiberio from Miller Tabak.

Tim Tiberio – Analyst, Miller Tabak

I guess when you look at the overall integrated farming space, there is a lot of companies coming at this from different angles. Maybe if you can just sum up very quickly what do you see as Monsanto’s competitive advantage longer term compared to some of the companies that are attacking the problem but maybe in a more piecemeal approach?

Hugh Grant – Chairman and CEO

So thanks for the question. I think the piecemeal description I think is fair. There is no criticism in any company but everybody has been wrestling with this, it’s so big. I think if you begin with the grower and work backwards integrating a field level or a sub-field level and then bringing the technologies and the decisions to bear at that level of granularity, it’s what unlocks — we think what unlocks that increment of yield and that’s never really been done properly until now. So Rob, I don’t know if you –

Robert Fraley – EVP and Chief Technology Officer

Yes, let me just add three things that I think are really unique. First of all, all of this builds on the genetic knowledge and it’s really unique to us that genetics of each individual, hybrid each individual, soybean or cotton variety and that really gets augmented by the ability to add to that the weather prediction to the potential of the genetics. Second thing is, it was mentioned, we have a large footprint to build on in terms of seed footprint around the world and an ability to apply that agronomy to other crops in world areas. And I think the last thing is, we’re going into this and we mentioned several times, we see this has been an open architecture model. So we would see ourselves working with other input providers and retailers. And I think that really creates the opportunity for coalescing and moving quickly with the great deal of speed. Thanks.

Operator

Our next question is coming from Mark Gulley from BGC Financial.

Mark Gulley – Analyst, BGC Financial

Thanks a lot for the kind of the high level view of climate control. But I was wondering if you could break it down maybe a level. Let’s pretend that I’m the farmer and you’re the salesperson and maybe, you think about how you would go through the season. What is it that you’re going to be selling me over the course of the season maybe and maybe you can bridge that to – I’m getting an initial benefit of 10 bushels an acre for corn now, just from the IFS, how am I going to get from 10 to 50 with additional incremental value that you’re going to bring to me as the salesperson.

Robert Fraley – EVP and Chief Technology Officer

Thanks, I’ll do it quickly and then I know Brett wants to add a couple of things, because it’s – I think one of the nice places to start is, there is a bit of selling involved in this, but this is really providing grower with sophisticated real-time agronomic information that really helps them in their decision making. So the first thing that comes down to is the seed selection for that farmer field and that seed selection changes as weather changes in the spring, just like we’ve seen this spring, farmers changed varieties, they changed hybrids and that’s a very weather related decision. In fact when you look at those 40 decisions that were talked about, many of those are dependent on a real-time basis on weather.

So down to the rainfall and the climatic conditions of each individual field determines what that farmer needs to be thinking about in terms of his forward decisions, when to spray to control bugs or insects, what they should be thinking about in terms of micro or additional nutrition. And those are all of the factors that I think we can help them with. And importantly, they’re all going to be based on our knowledge of the genetics and the ability of our seeds to respond to those climate conditions. And that’s what makes it so special. Brett, maybe a couple of comments from the commercial perspective.

Brett Begemann – President and Chief Commercial Officer

I think as I look at this, it changes the relationship that we have with the farmer. So if you think about how this goes forward, you sit down with the farmer, you’ve got access now to this tremendous data capability to first of all recommend the product that fits the best across the field. Then you continue to leverage that data as well as real time data that’s coming in from the source of the field throughout the year from variable sources to help as Rob was describing and that’s where I come back around to.

I think one of the big competitive advantages here for Monsanto going forward is we see this as an open architecture, we see this as a platform that brings partners together so that we’re all working with real-time information to go farm-by-farm, field-by-field to drive the productivity of the land. There is not a farmer out there that does not recognize that there’s variability in the field. And they’re all really excited that we are trying to help them address that variability and it’s going to take all of us and that’s the piece that I think will change how we represent with the farmer the opportunity that we have here.

Bryan Hurley – IR

Kevin, this is Bryan. I realize we’ve run long here, but we’ll wrap up here with one last question. And then we’ll turn it over to Mr. Grant just to wrap things up finally.

Operator

Certainly, our final question today is coming from Kevin McCarthy from Bank of America Merrill Lynch.

Kevin McCarthy – Analyst, Bank of America Merrill Lynch

Question on your soybean gross margin guidance, up 600 to 800 basis points, if that puts you up most of the way back to where you were in ‘12. Can you help us understand the components there in, in terms of how much might be cost relief versus contributions from Intacta and your royalty agreement with DuPont?

Pierre Courduroux – SVP and CFO

Kevin, you’ve touched on the three key points there. I mean, that’s really exactly how it plays out. So both Intacta and the agreements with DuPont provide us definitely with revenue at extremely high level of margins because those are, in both cases, royalty flows and there is also an element of cost of goods improvement that we will enjoy in 2014 compared to 2013. So that’s exactly how you get to the six to eight points.

Kevin McCarthy – Analyst, Bank of America Merrill Lynch

As a quick follow-up, when would you expect The Climate deal to become accretive, Pierre?

Pierre Courduroux – SVP and CFO

So as we said during the prepared remarks, we’ve got a case to build this business and get it accretive as early as in two years. That’s the goal we have right now.

Operator

Thank you. That does conclude our question-and-answer session. I’d like to turn the floor back over to Mr. Grant for any further or closing comments.

Hugh Grant – Chairman and CEO

Thanks, Kevin. So let me begin by thanking you for joining us on the call this morning. It’s an important call, it’s an important time for Monsanto. So let me conclude the two brief points. First, a point on the core business. We have confidence in our base business and if you set the acquisition aside, this is a year where we see some of the strongest growth in our key operational elements of the business. Secondly and I think this is important because we are building on that business growth with our acquisition of The Climate Corp. It’s an important addition, it builds out our IFS platform. It creates the IFS platform in the near term and it will strengthen our growth rate over the coming decade. So, I hope that you will join us for our Investor Day in November. We will take the opportunity during the November meeting to further highlight this unique opportunity. And I look forward to seeing you there in St. Louis. So, thanks again and all the very best.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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