Skip to content
Home » Monsanto Company Q4 2014 Results Earnings Call Transcript

Monsanto Company Q4 2014 Results Earnings Call Transcript

Edited Transcript of Monsanto Company Q4 2014 Earnings Conference Call…

Company: Monsanto Company (MON)

Event Name: Q4 2014 Results Earnings Conference Call

Date: October 8, 2014 09:30 AM ET

Operator: Greetings and welcome to the fourth quarter 2014 Monsanto Company earnings conference call. (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, you may begin.

Bryan Hurley – IR

Thank you, Jessie, and good morning to everyone. Thanks for joining our fourth quarter earnings update. I am joined this morning by Hugh Grant, our Chairman and CEO; Brett Begemann, our President and Chief Operating Officer as well as Pierre Courduroux, our CFO. Also joining me from the IR team are Ashley Wissmann, Tim Boeker, and Laura Meyer.

This call is being webcast and you can access the webcast, supporting slides and the replay at monsanto.com. We have provided you today with EPS measures both on a GAAP and on an ongoing business basis where we refer to non-GAAP financial measures, we reconcile to the GAAP in the slides and in the press release, both of which are on our website.

This call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risk and uncertainty, the company’s actual performance and results may vary in a material way from those expressed or implied in any forward-looking statement. A description of the factors that may cause such a variance is included in the Safe Harbor language in our most recent period report of the SEC and in today’s press release.

This morning, our focus is on the outlook for our next fiscal year where we expect to deliver continuing strong growth. While today’s call will focus on that outlook, let me set up the conversation with the couple of key points from our fiscal year ‘14 results on Slide 4.

With year-end ongoing EPS of $5.23 and free cash flow of $959 million, our final results came in ahead of our updated guidance. Just as importantly, we said a priority in 2014 was to demonstrate Seeds and Genomics would return as the biggest driver of our growth, and with the final results, Seeds and Genomics delivered the majority of our gross profit growth, creating the right momentum as we think about what matters in 2015.

So with that, let me hand it to Hugh to take us through our updates this morning and the next step in our growth outlook.

Hugh Grant – Chairman and CEO

Thank you, Bryan, and good morning to everybody on the line.

The fourth quarter is traditionally the point where we focus on the outlook for the next 12 months. That look forward is particularly important as we set up our fiscal year ’15. And even with the more challenging commodity environment, Monsanto is set to deliver strong growth both in the near-term and over a multiyear horizon.

We closed the fiscal year ‘14 a bit above our earnings guidance demonstrating our ability to deliver growth against more headwinds and marking our fourth consecutive year of strong earnings growth. We expect that growth to continue in 2015.

Let me share the key themes in that 2015 outlook as laid out in Slide 5. First, it begins with who we are. We’re a growth company. Our opportunity is built on innovation, our value to our farmer customers as a technology provider, and we have a portfolio and product pipeline that separates us from the commodity world.

That sets up the most important theme in our outlook, 2015 as a leverage year for Monsanto, in which we’re able to commit the strong growth today and at the same time step up significant incremental investments to unlock future growth.

There are a few companies as well positioned to dedicate a level of spending to deliver truly transformational long-term platforms while maintaining tangible near-term growth. This is an either/or situation of growth or investment. We plan to do both in 2015, and that’s the key opportunity this year.

As we deliver growth in 2015, as we stay focused in our customers, and as we continue to invest to unlock new growth, we can widen our long-term competitive position in an industry that’s particularly near-term focused right now.

There is no doubt that our 2015 growth is important, and we’re really focused on delivery. This morning, we laid out our EPS guidance of $5.75 to $6 reinforcing our confidence in our ability to deliver the double-digit to mid-teens growth that we targeted for 2015. That confidence comes directly from the strength in our core business as there is no hesitation that our seeds-and-traits engine is set to deliver strong growth that’s the pacesetter for our EPS growth this year.

So in a year where delivery matters, we’ll be clear about how that growth plays out. This year, the industry will certainly face the headwinds of a more challenging agricultural environment. We’re not immune, and our guidance factors that in, but our more balanced global business also gives us more tools to manage the puts and takes. The proof of that came in 2014 as soybean emerged as a true differentiator balancing the shifts in the global corn environment.

With macro factors that change every year and a business that has become more global, the pattern of the flow of the business through the year has been changing. That will be true again in 2015. Brett and Pierre will cover the key factors, but practically we’d expect the shift that creates a smaller Q1 and builds growth as we reach our large market seasons over the course of the year.

2015 is also a year where we have more tools. We’re now more aggressively using the strength of our cash generation and our balance sheet, providing a structural benefit through our $10 billion share buyback program that supports our growth of returning more value to our owners.

So, all of that’s important because it sets up the opportunity beyond one year, and that’s my final theme.

Over the course of 2014, we took a bolder approach and outlined the five-year target to at least double our ongoing EPS, and we feel as good today as we did when we outlined our goals both in the near-term springboard of 2015 and the multiyear path.

At macro level, the fundamentals of agriculture on Slide 6 continue to be compelling. Global grain demand is expected to grow every year through the end of the decade. The reality is with grain stocks replenished from this year’s harvest, we’re in a better position to meet normalized demand, and there’s already the first signs of increased use across exports, ethanol, and animal feed. And given availability, costs in the environmental footprint, adding new acres isn’t likely to be the long-term answer to this demand.

So, the world needs to increase the rate of gain seen in the last five years by around 2x in corn and by 5x in soybeans, just to meet baseline demand. That means yield and innovation are going to matter more than ever, and that’s who we are.

At company level, we have more clear catalysts and more levers across our business than we’ve ever had before. And that’s furthered by our focus on next-generation platforms that have the potential to be transformational in our growth horizon. So our roadmap over the next five years is in place and it’s just clear as it’s ever been. It’s not distant growth at the backend of the decade. We’ll expect strong growth in 2015 that builds a cadence of consistent growth carrying from 2016 to 2019.

We’ve everything that we need to make it happen and we’re focused on execution. Perhaps more importantly for the long-term opportunity, this is a gateway year where our strategy, technology, and opportunity can actually extend our leadership position and unlock the next leg of growth over the next five years in our business.

So with that, let me hand it to Brett, to walk you through the operational plans to back up this outlook. Brett?

Brett Begemann – President and COO

Thanks, Hugh and good morning to everyone on the line.

We are anchored on a five-year growth opportunity on Slide 7. The opportunity to at least double our ongoing earnings per share by 2019 is a compelling target that speaks to our confidence in growth this year and for the remainder of the decade. And we’re on pace for what we need to deliver in the first year.

Just as importantly, we haven’t lost sight of our customers as they deal with softer commodities and macro trade-offs. We have made progress and applied our learnings over the past few years. So being consistent and staying close to our customers this year is important in holding that momentum so that we’re in a good long-term position as agriculture comes out of this transition.

From that, we’ve built our operational plans, and there are three key factors on Slide 8, I’m focused on this year.

Number one is seeds-and-traits growth. Simply put, we expect seeds-and-traits delivers double-digit gross profit growth, which is the primary driver of our earnings growth.

Number two, seeds-and-traits is balanced against our continued strategic management of the Roundup business. Overall, we feel good about the expected full year Ag productivity contribution for 2015 as well as the long-term steady state outlook. We do, however, expect the contribution from our Ag productivity business to soften in 2015 as the overall market normalizes after a strong 2014.

The biggest variable in 2015 is actually the timing of Ag productivity earnings more than any strategic factor. We would expect the majority of the year-over-year earnings decrease shows up in Q1, reflecting some changes in timing and product mix as we’ve moved more of our volume in ’15 from the non-branded supply business to sales in our flagship brands.

Number three, this is a year where the strength in our core business will allow us to aggressively invest to drive Climate and other new platforms.

Against those factors, the metrics that matter this year are on Slide 9. First, we’re going to build on the record soybean year in 2014 as we expect it to become one of our most meaningful platforms and the first of our billion dollar plus growth drivers.

Soybeans were real differentiator in 2014, providing the offset to the macro corn shifts. That record-setting year in soybeans also drove our bottom line results, providing the business lift for us to reach the high end of our overall guidance.

The biggest contributor in 2015 is clearly the Intacta opportunity in Latin America on Slide 10. We are on track with the 10 million to 12 million acre target we laid out, marking a record second year adoption pace for a soybean trait. Penetration of Intacta at this level effectively places us at the tipping point of adoption in FY15 and sets us on an accelerating trajectory across soybeans over the next few years.

That’s furthered by Roundup Ready 2 Xtend on Slide 11, which moves into the final commercial preparation in 2015, setting up soybeans for a multi-trait multi-geography opportunity, covering a market of almost 200 million acres in North and South America during our five-year growth horizon.

That accelerating soybean opportunity is backed by $2 billion plus platforms in our global corn business. In 2014, we increased our corn margins, even as our corn business absorbed several $100 million at the GP level from lower acres and currency effects. That came from a couple of strategic metrics: our COGS were lower; our portfolio mix was on track; our total price was positive; and we had good volume against declining planted acres. That carries us into 2015 where the growth opportunity comes from a combination of those same strategic drivers.

First, the most important factor is our portfolio upgrade on Slide 12. This is structural because it ties directly to our ability to introduce new better performing products every year, and the track record bears that out.

Regardless of the environment we’ve increased our average price in our portfolio every year in the last decade. Our 2015 strategy reflects that: the portfolio is in place, price cards are out in the Northern Hemisphere and we see mix benefit from our portfolio lift. We continue to see that uplift in the range of a mid-single digit benefit and that provides a consistent contribution across our global portfolio.

The second factor is the continued expansion of our underlying footprint in corn on Slide 13. Practically, we don’t expect overall planted acres to make a significant rebound in 2015. In key regions like Latin America, shifts away from corn planting are likely to create further headwinds. However, in other regions like Eastern Europe, there continues to be opportunity for added volume.

Against that, we expect our footprint to expand and that comes from two sources: continued growth in established markets along with opportunity in newer emerging markets. The ability to grow our volume in a declining macro market demonstrates there is resilient demand as we continue to deliver the best performing products.

Lastly, we also expect some continuation of the COGS benefits. While obviously not as pronounced as it was last year, we do expect some residual cost tailwinds.

One additional element on Slide 14 that ties these drivers to our added focus on our farmer customers revolves around our multichannel distribution approach in the U.S. This is a key differentiator. We’re able to meet farmers wherever they prefer to buy their seed, giving us more touch points for the key seed decision. The anchor of that strategy remains the full service reach with our retail partners, and that doesn’t change.

But within our regional brands, our customers also told us there is more opportunity to further the relationship component for the direct-to-grower brands. So we’ve evolved our Channel seed brand to a model with even more of a direct-to-grower sales force, so they spend more time on the ground with farmers while shifting supply chain activities to us where we excel. That results in a change that shifts the timing of some sales, but in a year where we want to stay close to our customers, it allows us to leverage our sales force that is highly motivated by day-to-day relationships with the grower. Over the long-term, that also furthers the footprint expansion opportunity in our largest market.

It’s clear that corn and soybeans are the drivers, but our outlook also factors in the rest of our portfolio. Our other crops, including vegetables and cotton, complement the core with an expected modest steady contribution.

Cotton is among our most international operations with significant contribution from the U.S., India and Australia. We expect nice growth from the U.S. and importantly, the first proof point in our Roundup Ready 2 Xtend opportunity as we expect to launch this Xtend platform in cotton in 2015. That’s offset early in the year by some macro trends as the Australia market is highly relying on water availability and the current draught is likely to drive acres down significantly. It’s a small but high value market. So while we expect good overall cotton growth, Australia will be a negative in Q1 and the growth through the year will be more aligned to the U.S. and Indian seasons.

The performance in the core business becomes a leverage point as we use 2015 to accelerate our new platforms. The most notable is our Climate Corporation platform on Slide 15.

2014 served as an important foundation year with better-than-anticipated progress as we combine the Climate capability with Monsanto. In fact, our base tools were used on nearly one in three U.S. corn and soybean acres this year, giving us a significant headstart in making this a true industry relevant platform.

In 2015, we’ll do three big things: We’ll step up our investment to leverage that headstart; we’ll cultivate further enrollment on the platform by increasing our active Climate users by another 50%; and we’ll take the first steps in building the runway with a focus on our entry level Premium Climate Pro offering.

On that upgrade, we’re applying the core Monsanto experience by building a value ladder of multiple offerings at multiple price points to incentivize trial and establish value, very similar to how we’ve thought about our biotech traits over the years. This makes it an important springboard in establishing the portfolio that will become a staple of our strategy moving forwards and part of our long-term growth opportunity.

Taken together, here’s how I think about the operational summary. There’s no doubt, it’s a challenging year for agriculture and our customers. However, because of the products and platforms we have, we can grow in that environment.

Just as importantly we’re focused on the year at hand but for us this is really about the runway of opportunity that begins in 2015. From here, each of the growth drivers becomes materially larger in 2016 and beyond, unlocking the next wave of Monsanto’s growth to the end of the decade.

With that, let me hand it to Pierre to walk you through the financials. Pierre?

Pierre Courduroux – CFO

Thanks, Brett and good morning to everyone on the line. As CFO, my priority is to have a clear view of the factors that influence our financial performance, those that we directly control as well as those that are beyond our control.

So let me build on Hugh and Brett’s outlook through that lens on Slide 16.

First, there is no hesitation that we can deliver growth in 2015. And doing so in a challenging environment is an important validation for our business. The current environment has people asking whether ag companies can grow and with our guidance for 2015, we are clear in our confidence that Monsanto can deliver strong double-digit to mid-teens EPS growth.

Second and importantly, we expect this growth to come from the right place and clearly from our seeds-and-traits engine. And this growth comes even after we incorporate the impact of the overall macro headwinds, the offset from our ag productivity business and a step up in our spending to fund future growth.

And third, the financial discipline we have demonstrated over the last few years will be a critical component to deliver our financials in 2015. This is a key element we control. So while we won’t lose the opportunity to invest in our pipelines and new platforms, we will match that with discipline across our cost base with the priority on delivering our financial results.

And likewise, our new capital allocation approach provides us with more tools to leverage the strength of our cash generation and balance sheet, while supporting our growth and returning value to our owners.

So let me start the detailed look with the key elements and assumptions underlying our guidance on Slide 17.

Our earnings guidance at $5.75 to $6 per share is consistent with the double-digit to mid-teens earnings growth that we targeted coming into the year. In tandem, we expect to generate $2 billion to $2.2 billion of free cash flow as we expect to see our earnings also translate into free cash growth.

There is a simple focused way to think about our outlook. Our core business is the overriding driver of growth.

There are two key offsets in ag productivity and in our increased investment in spending that each stand for several points of that growth, and finally our buybacks then round out the supporting benefit.

Let me give you the details. First and foremost, as I said, the primary driver is our core seeds-and-traits engine where we expect to deliver double-digit growth on the GP line. We anticipate more than three quarters of that overall GP contribution comes from our two core corn and soybean businesses. From there, we expect smaller, steady contributions from the rest of our seeds-and-traits portfolio.

Within this gross profit outlook, our guidance builds in a realistic view on the current environment. As Brett mentioned, with the decrease in acres in the Latin America summer season, we don’t see a significant rebound in planted corn acres in key regions this year.

Additionally, our outlook builds in a prudent view of the current conditions around global currency as we anticipate similar currency movements as last year. So our guidance incorporates limited erosion for the key global currencies in 2015.

And this also ties to the political landscape where we also anticipate some of the turmoil that has been a reality in places like Argentina and the Ukraine will continue, although our 2015 guidance assumes reasonable operating environments in both regions.

A key offset to the seeds-and-traits growth at the total gross profit level is the ag productivity segment. Practically we expect the peak pricing environment we have seen in glyphosate last year may soften some. And as a result, our guidance assumes ag productivity gross profit as the potential to be down in the range of 10%, offsetting some of the core growth from our seeds-and-traits engine.

The second important offset is our spending as our outlook factors in a disciplined near-term increase in operating expenses. Very specifically, given the transformational opportunity in our new platforms and particularly in our Climate Corporation platform, we are putting extra investments in SG&A and R&D to build on our acquisition and accelerate the long-term opportunity.

For fiscal ’15 the total operating spend in new platform is expected in the range of $350 million, representing an incremental $150 million of our total 2014 expense.

Increasing our operating expense is not something I take lightly. It becomes a priority because we believe the long-term opportunity is compelling and because we have the strength in the core business to support it. Importantly that conscious new platform spend is balanced against our base business operating expenses where we expect only inflation level increases in SG&A and R&D as we take a disciplined approach to our overall expense management.

The final factor in the financial outlook is the net effect of share buyback program. The benefit of the share count reduction is balanced by significant step up in interest expenses related to our debt offering in June. Depending on the balance and timing of our share repurchase, we anticipate the net effect to provide a positive contribution of around 4% to 5% to our total EPS growth in 2015, largely coming in the second-half.

The next point in the delivery year is being very clear on how that guidance flows through the annual earnings pattern, on Slide 18. As Hugh mentioned, our business has expanded globally over the past several years and with that we’ve seen the earnings flow evolve between quarters, this is equally trailing 2015, so let me walk you through the expected earnings flow for this year.

Basically, we anticipate a shift in the full year flow that creates a smaller Q1 and the concentration growth in Q3 and that comes from several key trends.

First, the macro environment doesn’t affect on two key parts of the business in Q1. Most prominently the reduced planted corn acres in Latin America affect the quarterly corn contribution and are magnified against the relatively small earning space in the quarter. Likewise, the Australian cotton business that Brett mentioned is also a factor in Q1. As acres are expected to be roughly half of the prior season; we expect an equivalent reduction in Q1 cotton gross profit.

Second, several of the business factors, Brett mentioned, also translate to some shifts in our earnings flow. The most important in Q1 comes from ag productivity volumes. A key piece is a timing shift that comes from one of its key structural benefits of our Roundup strategy. This year we are able to move more of our volume from contracts in the lower supply business to our flagship brands creating a mix benefit and this reduction in the supply volume is largest in Q1 and the increase in the branded business is largest in Q3, which aligns to the over-the-top markets in the Northern Hemisphere.

Including that shift we did expect the Q1 ag productivity GP contribution to be about 75% of what it was last year. That means that the majority of the full year ag productivity downside I discussed actually would be incorporated in Q1 and the branded volume will translate to a greater percent of revenues in the second-half of the year.

Beyond Q1 the biggest first-half effect is the modification in our Channel seeds brand which creates a shift in the revenue flow. In FY ’15, we will book sales as we ship seeds to the grower, rather than the historical pattern where we booked sales with seed shipments to distributors that change is expected to shift several hundred million dollars of GP from Q1 and Q2 into our third quarter.

So together those factors have the most effect on Q1 and we will build from there to reach our full year GP and earnings growth in the second-half of the year. We expect Q1 to come in at about roughly half of their total earnings from last year’s Q1; we expect Q2 to be roughly flat year-over-year, but expect to see significant uptick in Q3 earnings as a majority of our full year growth flows through that quarter. And this will be punctuated by the Q4 that is likely to be breakeven to positive on an absolute basis.

The last piece I want to cover today is our cash generation and use, on Slide 19. Fiscal ’15 will mark a rebound year for free cash generation as we don’t anticipate having the effects of the outlay for the climate corporation acquisition or the Novozymes alliance. More importantly at the level of 2 billion to 2.2 billion in cash generation, we expect to see conversion of growth into cash.

The second piece of that is our cash use. Since we announced our new capital allocation strategy in June, we’ve had a very successful debt offering that set up the first installment of our 10 billion share buybacks through an accelerated share repurchase program, that is a strong initial step in our more aggressive use of capital and this sets us up to continue to prioritize returning value to our owners.

Today I’ve focused a lot on the mechanics of our plan, but let me end by stepping back and reinforcing why delivering in 2015 become such an important point of leverage for ongoing growth on, Slide 18.

From a financial perspective I have focused on three legs of our strategy: financial discipline, business growth and the ability to return value to share owners. Today we are more balanced global business that’s capable of delivering real growth even against micro viability. Just as importantly we are a company that has strong embedded organic growth and meaningful new platforms in place today and we’ve got ability to use our cash generation and balance sheet even more strategically. We have the tools to continue the stepped-up focus on shareowner value, that is more powerful than just the growth this year. It’s truly the source of confidence and the opportunity as we target at least doubling our ongoing EPS in five years, an outcome only a company that innovates in this space and deliver.

Thanks. And I’ll hand it back to Bryan for the Q&A.

Bryan Hurley – IR

Thanks Pierre. So with that we’d now like to open the call for questions. As we typically do I’ll ask that you please hold your question to one per person so that we can take questions from as many people as possible. So Jessie, I think we’re ready to take the questions from the line now.

Question-and-Answer Session

Operator: (Operator Instructions) Our first question is coming from the line of Vincent Andrews with Morgan Stanley.

Vincent Andrews – Analyst, Morgan Stanley

Brett, maybe you could just comment a little bit. I guess it is early days in the order book for next year in the US, but you said price cards are out. Presumably you have seen the competitor price cards. Is there anything that is going on that is deviating from your expectations in terms of where sort of the overall market is both in terms of price points on new and older products as well as maybe timing of order discounts or anything like that? Are you expecting the order book to fill a little slower this year just given the corn price and uncertainty around acreage?

Hugh Grant: Yes, thanks Vincent and good morning. I think, first of all it’s important to put this all in the context of what the farmers are facing right now. The last report I looked at where we’re running at about 50% of the five year average for harvest, it’s been really wet across the big corn and soy belt and it’s slowed down harvest. So as you can imagine that’s what the focus of farmers has been. So there has been some slowdown in their anticipation and looking at what they’re going to do on seed choices. But to your point, our price cards have been out, our competitor price cards are out there, supply situations are similar to last year where we all have ample supply. And I would tell you at this point that we feel comfortable with how we’re positioned in the marketplace and feel good about moving forwards.

Vincent Andrews – Analyst, Morgan Stanley

When would you — usually Thanksgiving is kind of the point in time where — right after Thanksgiving, where you have a sense of where the order book is and at least how through the first half is shaping up. Do you think that is going to be later this year? Should we be thinking more towards the first of the year, or what do you think there?

Hugh Grant: This time, Vincent, as I mentioned the farmers are totally focused on getting harvest, and I don’t see anything. It doesn’t say it’s going to be a pretty challenging harvest for our customers this year. The weather continues to be wet, there is a lot of rain forecasted again for later this week and it’s going to be difficult for them to get it out, that’s going to be their primary focus. So I would expect the things will continue to be slow as we go through the ordering season with their primary focus being on getting the crop out of field.

Operator: Our next question is coming from the line of Christopher Parkinson with Credit Suisse.

Christopher Parkinson – Analyst, Credit Suisse

You mentioned some modest changes for your Channel platform, targeting getting closer to the grower. Can you talk explicitly about what the margin effects are and the reasoning for the change this season? Then also going forward, just randomly, is there anything else you can do on DEKALB as well? Thanks.

Hugh Grant: Thanks for the question, I don’t anticipate there will be any margin effect now, but Pierre maybe a little bit more color on how it shapes up between the quarter.

Pierre Courduroux: No, really the change gives us better access to the farmer to the grower directly and that’s really what we are targeting here. From accounting perspective, what we do is now we will have to recognize the revenue as the product is delivered to the farmers. In the past, we were just moving the product to our distributors and selling it to our distributors. So the change is really not material from a margin perspective, it doesn’t impact the business relationship, it just shifts actually the income from Q1 and Q2 into Q3 and to give an order of magnitude you’re looking at $200 million to $300 million that will be transferred from those quarters into Q3.

Operator: Our next question is coming from the line of Don Carson with Susquehanna International Group.

Don Carson – Analyst, Susquehanna International Group

Question, back to US corn. We hear a lot of talk of growers potentially trading down on traits. So maybe just tell me what you are seeing thus far in terms of their willingness to buy premium genetics versus their willingness to buy traits. And even if they want a trade-down on traits, is there enough single- and double-stack product out there that they could even do that?

Hugh Grant: Thanks for the question, good morning. I’d maybe ask Brett to give a little bit, but it kind of goes back to the order book by two or three points. Number one, in the tough ag environment and it clearly is the very last thing that’s traded out by the grower is the seed, so he takes a long hard look as machinery purchases, he thinks twice about what he is doing with soil nutrition. And he will even take a hard look at chemical purchases, but the last thing he compromises is on his seeds, and we’ve seen this for a decade now where our best sale and our best perform in hybrids and our best technology packages are the first to sell.

So we’ve been conservative this year, we’ve been very careful in our price cards and how we’ve laid that out given the environment. I think ’14 has been instructive, and if you look at our performance in ’14, when you strip back forex and you strip back shrinking acres, our performance globally, we grew or maintained share in pretty much every market around the world this year and a big piece of that was driven by performance. So headwinds in ’15, I think we’ll expect in the same breath.

Brett Begemann: Yeah, as we look at ’15 Don, I anticipate similar headwinds to what we saw with the currencies. I wouldn’t say at this point we expect the same amount of deterioration and the acre base that we saw last year, but obviously it’s starting out under pressure in South America. But to Hugh’s point, we did really well with our price lift last year, we got the mix improvement that we were shooting for, our COGS improved and we held and grew share in the all key markets around the world. So, as I look at this year in specific to your question around trading down on traits.

The key in this Don is the biotech solution for corn rootworm is still the most compelling offer for the farmer that has a corn rootworm problem. And I simply don’t see a farmer facing significant corn rootworm pressure to trade away from the biotech solutions that are available and the platform that we’re selling today is very similar to what we have before, and we continue to add better and better genetics to that SmartStax platform. You might see a few farmers on the fringe areas that don’t really have a corn rootworm, but they may shift around a little bit. But those are on the margin and they’re not material in that shift. I really anticipate our portfolio to look a lot like it did this year as we go into next year.

Operator: Our next question is coming from the line of Bob Koort with Goldman Sachs.

Robert Koort – Analyst, Goldman Sachs

Hugh or Brett, you guys talked about this $4 billion of incremental seeds-and-traits growth in the next 5 years. I guess it seems pretty dramatic in the context of the prior 5 years; I think that growth rate was more like $2 billion. And on Slide 6 you note that in the past 5 years the industry output has been mostly about acreage lift and not yield lift. So it seems like maybe the entire industry was benefiting from those trends. And if you look forward, you’re going to grow twice as fast but the acreage isn’t going to grow as much. So does that imply you expect a much more dramatic market share lift or more dramatic pricing gains? Can you talk us through the components that get you that substantially higher growth rate in what arguably might be a much tougher industry context?

Hugh Grant: Bob, thanks for the question. Brett has been talking for a couple of years about the decade of the soybean and we’re fast approaching the inflection point on that decade. So a big piece of this is the final coming of age of soybeans and particularly the post launch growth in Intacta in Latin America. So that’s unique to Monsanto, it’s a really big opportunity. And if you believe there is going to be, compared for last 5 years a limited number of new acres. This is going to be the next 5 years is a bit sustainable intensification and unlocking a differential yield and I think Intacta and behind that Xtend in beans really make a big difference we see that as a bigger opportunity. You see some in ’15 but it really flies in ’16. Brett, I don’t know if you – if maybe another word on that and some of the other growth blocks.

Brett Begemann: I think that’s exactly right and don’t get me wrong I’m absolutely thrilled with the success we had in ’14 with Intacta in South America. And I’m just as excited about establishing a new metric if you’ll or a new benchmark for increasing those acres this year on 10 to 12 million acres of Intacta. We’ve never been able to expand that fast, but to Hugh’s point ’16 really becomes a huge inflection. But I also think it’s important to keep in mind our corn business and the growth we anticipate from corn.

As I mentioned before, we did achieve our price lift in our mix improvement and our COGS improvement and we do continue to grow our footprint and our platform around the world and with the focus becoming more on how we increase productivity on any given acre versus new acres that bodes well for us. And I’m highly confident in our breeding program that continue to bring those new genetics and allow us to continue that performance. And as Hugh mentioned we have the 2X the rate of gain that we’ve been seeing in corn just to meet the expected demand of corn around the world and I think we’re very well positioned to participate in that. So that’s really the fundamental driver that helps drive our corn portfolio around the world, that’s the other big part of that growth on top of the soybeans.

And then of course we can’t forget the other smaller crops that we’ve out there that continue to grow and then on top of that as you get towards the end of the decade the new platform start to kick in more we’re investing significantly in climate, and I’m thrilled with where we’re in that position in the market place and we’ve a head start. We’re going to build on that this coming year and by the end of the decade you see that starting to contribute as well. So I do feel good about being able to accomplish that.

Robert Koort – Analyst, Goldman Sachs

Brett, as my follow-up, you gave the platform growth and the components over 4 years. If I look to what you guided to for this year, a double-digit Seeds-and-traits, given that the acreage isn’t going to move much and you’ve got the $150 million of incremental platform growth spend, can you give us some sense of how those buckets would arrange just in the next 12 months, components of that earnings growth?

Pierre Courduroux: Bob, I mean obviously there are a lot of moving pieces and maybe going in too much detail may end up being confused. So, what I propose maybe let me lay out for you our key planning assumptions. So, when we look at our double-digit growth in Seeds-and-traits GP as we mentioned it has to come from corn and soy and that’s really what we are basing ourselves on. So, in terms of assumptions – overall, we’re assuming a flat global acre for those two crops and obviously there will be some minor give and take in between the two crops but as you know we were very well positioned to take advantage of that.

From a currency perspective, we’re basically looking at a similar impact as what we saw this year. So, definitely where is the growth coming from, the soy opportunity I think is very clear to everybody so we’ve got obviously the Intacta opportunity in South America. We’ve also got a great dynamics in the U.S. markets and that’s something you can see in our numbers. I mean our soy performance this year beyond Intacta has really been in the U.S. market and then we’ve got the continued ramp up of our agreement with Pioneer, which is also going to impact our soybeans numbers, so soy being a key driver for growth and obviously corn.

So, specific to corn, we are definitely expecting to see the consistent mix lift that we’ve enjoyed a little last few years then we know we can still count on the continued tailwinds from a cost of goods perspective I mean our planning assumptions are looking at continued tailwinds there and we are also very confident I mean based also on what we see in the market right now in our competitive position from a volume perspective. So these are the three key drivers. On top of that, we should start to see the benefits of our new platforms but it’s not going to be dramatically material this year. So, this is how we build our plan, these are the key assumptions there. And that’s why we really have this confidence that we are setting up a base that’s going to allow us to grow this double-digit growth in 2015 but also maybe set the base for future growth beyond ’15.

Operator: Our next question is coming from the line of Mark Connelly with CLSA.

Mark Connelly – Analyst, CLSA

As you talk about growth, we are not hearing you talk about vegetables very much. Several years, the story with Seminis was that we were going to see an accelerated product launch process. Then we saw Europe slow down. What is the current growth view of Seminis? Has that business just not panned out the way you thought it would?

Hugh Grant: It’s been slower but I would say — let’s say Mark if you look at this last year 2014 we never talked about it much but we saw a real turnaround in the veggie business in 2014. And we look at freshness index that’s kind of ironic in a vegetable business. But we look at how much of that new portfolio, how much of the new breeding lines, are contributing to overall performance. In the last year or two we’ve seen a nice lift there. So, the learning for us is veggies took a hard knock through the recession. You would never expect it, but consumers traded down in vegetable consumption particularly in Europe particularly in Western and Southern Europe. But we’ve put a lot of energy in the executional detail and operational focus, and we’ve seen a nice — this last year 2014 we saw nice lift in that business. So I wouldn’t count vegetables out.

Operator: Our next question is coming from the line of Jeff Zekauskas with JP Morgan.

Jeff Zekauskas – Analyst JP Morgan

Hi, good morning. In your slides you said that you think that your corn volumes will grow in 2015. You have talked about how South America is already slow; and presumably corn acres in the United States will drop, I don’t know, 5%, something like that. So in the scheme of things, can you explain why corn volumes should grow in 2015? How might volume in Eastern Europe or in some other geography offset the pressure that is in your two key geographies?

Hugh Grant: Jeff thanks for the question. I’ll maybe pass a piece of this to Pierre, but our assumptions are on acres, who knows we’re sitting here in the fall and we don’t have the crop harvested yet. But our plan and our operating assumptions are that acres will be about flat with last year. So in the U.S. we said all the way through last year we would be happy if the crop had 90 something, it looks as if it probably had an 8 in front of it. And as we go into next year plus or minus I think acres will be about the same. The Latin American markets are still playing out in front of us but there is no doubt that acres are going to be down, the question is how much. And a lot of that is just them watching U.S. harvest. And I think a fair operating assumption is it’s going to be flattish down there as well. But as Brett mentioned and has points we’ve seen either share maintenance or share growth in every one of our key markets around the world, so we will see some volume growth based on that.

Brett Begemann: I think the other thing, Jeff, I’d just add to that. I think as you look at Eastern Europe, we continue to see the expansion of that marketplace to higher performing genetics and that bodes well for us as we’re extremely well positioned over there, so you get good volume growth in an environment like that, that helps offset some of things that we observe that’s going on in Latin America, and as Hugh said, it’s still hard to call right now and what acres are going to do.

I would tell you though, I remind you that as we look at the macro-environment that’s out there. Ethanol plants are running as hard as they’ve ever run. We’re seeing the animal feeding industry picking back up and I think this big pile of corn that we’re facing with, with the global demand continuing to grow I think that’s going to deteriorate. And most importantly for me as I look at it and the trade-offs that I look at is I can’t say here today and tell you what the acreage are going to be, but I can tell you that nobody has the soybean platform that Monsanto has, and in South America as soybeans start trading into replace corn, we’re extremely well positioned to participate in that. And if that occurs in the U.S. most likely if corn acres slow down they’re most likely going to go to soybeans and we’re well positioned to participate in that. So I believe that that portfolio balance is really important for us and that will play out over the year.

Jeff Zekauskas – Analyst JP Morgan

And for my follow-up to your corn seeds volumes grow in 2014 globally?

Brett Begemann: No, if you look at this past year, we delivered on all the metrics that we were looking at as I have mentioned that couple of times, the significant reduction in corn acres in particularly in the Americas really put the damper on corn growth. So we were slightly down to flattish on the overall corn volume. But the things that we were following really drove our performance in corn, it was just simply the acres.

As I have mentioned, I am not expecting the same level of deterioration for next year as we saw this year.

Operator: Our next question is coming from the line of David Begleiter with Deutsche Bank.

David Begleiter – Analyst, Deutsche Bank

On the same subject, the US corn share, was it flat this year? Was it up modestly, given the big decline in corn acres? What do you think happened to your US corn share?

Brett Begemann: Good morning David, this is Brett. We’re setting here harvest time and this is always the frustrating time because we still don’t know what the actual planted acres are going to be in the U.S. And as Hugh mentioned, we believe they probably have an eight in front of them and that will sort itself out over time.

Here is what I can tell you, from looking at our branded business and our license business there is absolutely no doubt in my mind that our genetic platform in the U.S. grew and that will sort itself out across the various brands. But I feel really good about how we performed in the U.S. corn business this year.

David Begleiter – Analyst, Deutsche Bank

And Brett, just on for ’15, so your corn seed gross profit margins increased at the same rates last year, or higher, or lower?

Brett Begemann: So I would expect the margin to increase as we’ve been saying and about the same to slightly lower.

Operator: Our next question is coming from the line of P.J. Juvekar with Citi.

P.J. Juvekar – Analyst, Citigroup

You are talking about shifting the supply chain going directly to farmers, can you tell us what percentage of your sales are direct to farmers today? And where do you see that going in the future?

Pierre Courduroux: So, P.J. this is not going direct to farmers and maybe we didn’t articulate it right. I mean the way we used our Channel brand and our Channel seedsmen in the countryside is basically an average channel of distribution that we’re using and I mean the size of that business, I don’t think we ever really disclosed the size of that business. I mean it’s definitely part of our brand share and an important part of our brand share, but we have not disclosed the breakdown in between the brands. What we know is this definitely an area that we’ve seen growth in and that we feel very good about.

Hugh Grant: I think the couple of hundred million would be — if you think about P.J. and trying to scale it amongst everything else to Pierre’s point when you see the shift in the third quarter it’s a couple of hundred million dollars. So we gained good insights that’s a really important leg of the stool but that’s what — it’s a leg of the stool. So between the Channel business moving where the revenue recognition that’s associated with it and a lot of our third party suppliers in that business now being translated directly in a brand that’s why we took the extra time this morning and explained some of those shifts. As frustrating as they are, I think they’re both really good moves for the business long-term.

P.J. Juvekar – Analyst, Citigroup

Thank you and then can you quantify the benefit you saw from the lower corn and soybean prices in 2014? And what is your expectation compared to that in 2015?

Pierre Courduroux: Yes, we did see some benefits there and in our margin improvements in our seeds-and-traits part half to two thirds of it was coming from COGS.

Operator: Our next question is coming from the line of Kevin McCarthy with Bank of America.

Kevin McCarthy – Analyst, Bank of America Merrill Lynch

I guess a couple questions on glyphosate, if I may. First, would you elaborate on what is causing the timing shift from 1Q into 2Q? And then related to that, I would normally think as you move and shift the mix from nonbranded to branded that that would help your profitability. But the overall year looks down 10% or so as per your guidance. So perhaps you could help us reconcile that.

Hugh Grant: Take the first piece; and Brett, maybe you can cover the second piece. We had some customers who — it’s an industrial supply of third party business, who have indicated that they will be stepping back or throttling back from that. So we’ve been moving successfully, we’ve been moving third party supply, and to your point, Kevin, into higher margin branded business. And as that occurs, we see that business moving closer to market applications. So in a world where we make and sell 300 million gallons, every gallon that you can sell with Roundup brand on it is marginally better news. So that’s the timing shift and then Brett, the margin effect that the slowdown of the 10% slight in the business.

Brett Begemann: Yes, good morning Kevin. So as we look at the overall Ag productivity segment specifically Roundup, I feel like we had a really strong performance here in ’14 as reflected in the final results and all I’m saying is I’m not anticipating that kind of strength through the entire ’15 and that’s why we try to range-bound it in the range down maybe 10% or so on the Roundup business or ag productivity that. But it’s really just about looking at how we expect to be positioned in the market and what we see from the competitive generic products in the market.

Bryan Hurley: Jesse, this is Bryan, I think we probably have time for two more questions so that we leave just a little bit of time for Mr. Grant to wrap up the call.

Operator: Thank you, our next question will come from the line of Joel Jackson with BMO Capital Markets.

Joel Jackson – Analyst, BMO Capital Markets

Just looking at Intacta in Brazil, on the part of the payment for Intacta on the back end, could you maybe provide some color on how it is going for you, getting paid and collecting payment on the back end? Thanks.

Hugh Grant: Yes, I mean good early progress because we’re in the front end of the launch process we’re selling a lot more seeds than we’re collecting at the grain elevator. So in many ways this is a bit easier at the start. Brett?

Brett Begemann: Yes, I think there is a couple of really important points and I think it’s important to not forget before Intacta was launched we had already reached the point where about 80% of the soybeans planted in Brazil were from newly purchased seed. So you combine that together with the fact that Intacta is in its early days, the primary source of seed for Intacta is newly purchased seed. With where the market already was, we feel really good about our ’15 opportunity for Intacta. And we’re in really good place, I look at the point of deliver system that we have in place with the grain handlers is really a backstop as we try to move that market to newly purchased high value seed. And we have that very much in place going into next year, so we feel good about it.

Operator: Thank you. Our final question is coming from the line of John Roberts with UBS.

John Roberts – Analyst, UBS

Thank you. The $150 million spend on new platforms. I assume that is just precision agriculture and biologicals. Is that an increase year-over-year, or is that an absolute number?

Hugh Grant: The absolute number is in the range of 360 million, the 150 is the increase year-to-year.

John Roberts – Analyst, UBS

And it is largely just precision Ag and biologicals that you are –

Hugh Grant: That’s correct.

John Roberts – Analyst, UBS

…for next year as well, or we plateau here at this level?

Hugh Grant: We’ll still see growth most likely note the same extent of growth obviously because this year is a significant investment we’re making but we’ll continue to invest in both platforms as we go.

Thank you, John, we brought forward some of that investment and I think that’s a piece of the uniqueness in the company and a tough year for the ag economy we see the opportunity to grow the base and simultaneously as we’re growing that base make this significant investment these two new platforms and use that to widen the gap versus as in our competition. So we’re going to do those two things simultaneously this year.

So, let me wrap up I would like on behalf of the team here in St. Louis I would like to thank you again for joining us on the call this morning. As always, this is an important call for us as we lay our plans and our expectations for what we see as the next milestone. And that ties to John Roberts question it’s the next milestone in a five year growth runway.

So let me just wrap up this morning by emphasizing two points.

Firstly, it begins in 2015. This is a year for us where we believe that we’re in a unique position to deliver strong growth today at the same time that we step up our spending to unlock transformational long-term growth.

And secondly, 2015 is really a springboard and an opportunity that we see over the next five years we don’t see this as backend loaded, we see really nice growth through the ‘16 to ‘19 timeframe. This starts in 2015 and that’s why we’ve been targeting at least doubling our ongoing EPS over that time frame. So we’ve a clear objective, the opportunity is real and we have the drivers in place and in hand. So we’re focused on delivering the opportunity and we look forward to sharing our progress against those milestones with you.

So thanks very much for joining us again this morning.

Operator: Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time.

 

Related Posts

Reader Disclosure: Some links on this Site are affiliate links. Which means that, if you choose to make a purchase, we may earn a small commission at no extra cost to you. We greatly appreciate your support.

Multi-Page