Monsanto Company's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Seeking Alpha

Executives

Bryan Hurley - IR

Hugh Grant - Chairman & CEO

Pierre Courduroux - CFO

Rob Fraley - CTO

Analysts

Vincent Andrews - Morgan Stanley

Jeff Zekauskas - JP Morgan

Don Carson - Susquehanna Financial Group

Frank Mitsch - Wells Fargo Securities

David Begleiter - Deutsche Bank

Bob Koort - Goldman Sachs

P.J. Juvekar - Citigroup

Bill Carroll - UBS Financial

Laurence Alexander - Jefferies & Company

Michael Cox - Piper Jaffray

Kevin McCarthy - Bank of America Merrill Lynch

Mark Connelly - Credit Agricole Securities

Vincent Andrews - Morgan Stanley

Michael Piken - Cleveland Research Company

Operator

Greetings and welcome to the First Quarter 2013 Monsanto Company Earnings Conference Call and Research and Development Pipeline update. At this time all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation and if anyone to require operator assistance during the conference please press star zero on your telephone keypad.

As a reminder this conference is been recorded. It is now my pleasure to introduce your host Bryan Hurley, Investors Relations for Monsanto.

Thank you sir. You may begin.

Bryan Hurley

Thanks Dan and good morning to everyone. Thanks for joining Monsanto’s first quarter earnings conference call. I’m joined this morning by Hugh Grant, our Chairman and CEO; Pierre Courduroux, our CFO; as well as Rob Fraley, our Chief Technology Officer. Also joining me are Manny Cruz, Bryan Corkal and Ashley Wissmann, my colleagues in Investor Relations. This call is being webcast, and you can access the webcast and supporting slides at monsanto.com. The replay will also be available at that address.

We're providing you today with EPS measures both on a GAAP basis and on an ongoing business basis. Where we refer to non-GAAP financial measures, we reconcile to GAAP in the slides and in the press release, both of which are posted to 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 statements. A description of the factors that may cause such a variance is also included in the Safe Harbor language in our most recent 10-K and in today's press release.

So today is an extended conference call that features the annual review of the R&D pipeline results with Rob but before we cover that Hugh will begin with the first quarter strategic review including our guidance update today and the early look at our Latin American and U.S. seasons.

From there Pierre will walk through the translation to our financial outlook. So with that let me hand the time over to Hugh to start us with the overview on the business.

Hugh Grant

Thanks Bryan and good morning to everyone on the line and let me wish you the very best in this New Year. The first quarter is an important milestone. It's the first data point that informs the outlook in the year and it's the annual data point around the progress and I can underscore that sets the tone for our confidence and our long term outlook. On the business side this first quarter came in even stronger than we initially expected. It's strength that comes from across our business portfolio so the key areas that we’re looking to drive our performance are firing on all cylinders.

That reinforces the strong fundamental environment and agriculture equally important that continues to reflect that with the right growth strategy in place the discipline to execute against it and that’s creating momentum. Practically that comes together on slide five to give us the confidence even at this early point to raise our guidance today, the $4.30, the $4.40 of ongoing EPS and $1.08 billion to $2 billion of free cash flow for the full year.

As many of you know raising a full year guidance at this early stage isn’t our typical practice. However, with a combination of the compelling results we’ve delivered from key businesses in the quarter and the strong outlook that we see in an early moving U.S. season we’ve a better line of sight in a typical year putting us in a unique position to increase our guidance even before the North American season ramps up. At any given year the variables come together differently in execution than they are drawn up during planning.

Our portfolio is setup well to manage the puts and takes that happens every year in agriculture. It's an advantage that we’ve realized as we have grown our business. I will highlight how that portfolio effect comes together and our early confidence and our increased full year outlook.

First, one of the most obvious areas of first quarter strength is in our cotton performance and of the most important drivers there is Latin America. Importantly, the Latin American opportunity is tracking very well, setting up the full year growth that we expect from this important element of our 2013 strategy. As we expected, the initial cotton acres in Brazil’s summer season were lower than last year, but the market is set for one of the largest ever second season Safrinha crops, keeping total acres on par with last year and even with some early[ph] rain delays in Argentina the cotton crop is on target with our planning projections. More importantly both Argentina and Brazil are in full swing on the cotton trade adoption cycle that is driving our immediate opportunity.

On Slide 6 you’ll see that in Brazil, the key to this year is the upgrade to the first true double-stack called VT PRO 2. With our sales in hand, it is the second highest volume trade in Brazil’s cotton portfolio, expecting almost one third of our total volume sold there in 2013, likewise, in Argentina on Slide 7, the upgrade is triple stack and is on-track to be more than 40% of our total Argentine cotton portfolio in just our second year of sales. Both of these upgrades are important because they create a margin upgrade that layers on top of our normal mix-up grade in the germplasm. The second indicator comes from the yearly insight that Q1 provides for our U.S. seed business as shown in Slide 8. A portion of the uptick in earnings in the quarter captures the fact that we ship more cotton and soy volume in Q1 than we did last year. If you pay that with a strong quarterly cash flow and customer pre-pays we are off to a very solid start in the U.S. with the historic (inaudible) as a backdrop we’re coming over harvest where our products really distinguish themselves despite an extremely difficult growing season and that shows in the first look at the order book.

At the end of our first quarter the order pays for the U.S. portfolio as a head of the same point last year and tracking very well against our overall 2013 targets. We are coming off two strong years for the U.S. business and in a good position to grow again in 2013. We are seeing the strength and volume growth, germplasm upgrades and our trade mix as we are on target for the step ups in our Roundup Ready 2 Yield platform in soy beans and the Genuity Reduced-Refuge Family in Corn. As banked by our cash flow and customer pre-pays, both of which are up year-over-year and the they provide a good indicator that there is solid commitment behind the order book. So, if we take these together, the bottom-line is our order book is strong and that speaks our opportunity to turn our early constants and to growth in the in U.S. as we start to see the expected acres planted this coming spring.

Next, perhaps the best other example of our portfolio performance this year is Ag Productivity. Ag Productivity in the Roundup business in particular has emerged nicely from our strategy reset a few years ago. Within that we are staying laser focus on our strategy within Roundup, we prioritize optimizing volume while holding a small brand premium over the generics. The generic price use has been tracking upwards for the past few months creating some positive pricing opportunity that shows in the Q1 numbers.

Overtime, we expect this positive generic environment cycles back to a more steady state environment toward maintaining of discipline and there is no structural change in our approach. But, it is a nice positive from the portfolio the layers (inaudible) proves the outlook for the full year. Our portfolio also has the strength to manage practical variability. Last year, we managed through variation in vegetables and in cotton. This year the parallel revolves around the uncertainty surrounding the complexity and timing of the ongoing legal process for Roundup Ready soybeans in Brazil. In addition to the evolving legal landscape and consistent with our deliberate approach to focus on business solutions we are also engaged in advanced discussions with some of the leading grower associations in Brazil which could provide an option for full clarity for all parties. If completed, an agreement may include some near term trade-offs, but would set the stage as Monsanto and these grower organizations focus on a successful and time to launch that maintains the integrity of a collection system and has out grown fairly paying for the use of Intacta.

We think that there is a past year is well worth exploring. Given the uncertainty and timing on the legal system and the opportunity for an alternate business solution we have decided the best way to address the potential unpredictability and provide clarity for the business and outlook is excludes an contribution from the Brazil round-up by the one trade from our current earnings and cash flow guidance. It's included that would reflect the historical range of roughly $0.20 to $0.25 of full year EPS contribution.

Regardless of the various developments, the legal challenges will lead to the pattern term timing for Roundup Ready soybeans not Intacta. So let’s step back and look at Brazil what’s ultimately going to determine our growth path will be the expansion of our corn business and the introduction of Intacta. So what we tend on creating the clarity and the focus to deliver on those two drivers.

So that underlines the early validation point while compensating for the uncertainty around Brazilian soybeans, our confidence to increase guidance today speaks clearly to the strength and the overall portfolio and why we see momentum driving our third consecutive year of strong growth in fiscal year ’13.

And finally as good as I feel about this year I feel equally good about our long term opportunity and at the heart of that opportunity is our R&D pipeline. This year there is a record number of advancements in the pipeline. I see this as the industry’s only integrated yield pipeline so we’re talking about more platforms and more ways to create yield value than ever before. Over the next decade we’re accompanying the best position to unlock the next wave of innovation that yields for our customers, sustainable productivity on the land and create incremental value in our business.

So with that let me have Pierre walk through the financials before we open an extended conversation this morning with Rob Fraley on the pipeline. Pierre?

Pierre Courduroux

Thank you and good morning to everybody on the line. Hugh covered the business drivers that influenced our full year guidance. So we’ll now concentrate on a focus review of how they translate into the financials but before I go into the details let me highlight on slide nine how I see where we stand as a result of this strong first quarter. First, we’re of course very pleased with our first quarter results. It's a quarter that stands out because we grew ongoing EPS by $0.39 year-over-year. Well that’s a very significant step-up for Q1 the quarter still represents only about 15% of our total earnings for the year and only a part of our anticipated growth. So while we performed ahead of plan I think it's right to look at Q1 prudently as a good first step to what our full year opportunity. Second within the quarter I see growth from multiple elements. As we have grown we’re getting more balanced contributions across geographies, across crops and across business segments.

It is that balance that allows us to manage to prove something’s like the Brazil soybean uncertainty and still have the confidence to raise our full year guidance and lastly I believe in a prudent approach to updating guidance. With a strong results we’ve seen for the quarter and the momentum we see in the U.S. we’ve better early visibility than a typical year. That is what gives me the confidence to raise a full year earnings and free cash outlook even though we’re still at a very early point in the year.

With the U.S. season developing in the second quarter will begin to see this early trends translate into earnings. So I like the position we’re in to deliver another strong year of growth. Let me now walk through how those trends show up in the financials. We’ve $0.39 of year-over-year growth our total ongoing EPS for the quarter was $0.62. The step-up for the quarter is roughly split between our Seeds business and our Ag Productivity segments. So I’ll focus mainly on the items that really drive our full year outlook. As expected the largest contributor to the fourth quarter was Seeds and Genomics and within that the most important driver was corn, seeds and traits.

A key portion of that growth relates to Latin America. With the expected business strength in Brazil, Argentina and Mexico the trait upgrade in Brazil and Argentina drives a mix benefit that shows up in the quarter and we’re expecting it to continue with the second growing season is Brazil. The other portion in this quarter is some positive timing associated with our US corn business. As our volume grows we manage the logistics around getting seeds into the distribution channel sooner and more seed moves into the first quarter. Together, the corn contribution drives the quarter and the full year as we continue to expect double-digit gross profit growth in the corn business to drive our overall Seeds and Genomics outlook.

Although Q1 is a small quarter relative to Brazil soybeans, we saw some effect on the soybean line as we suspended collection of royalty payments during the portion of the quarter. As Hugh indicated, the historical annual contribution for Brazil soybeans would be in the range of $0.20 to $0.25 and we made the decision to exclude it in our EPS Seeds and Genomics GP and cash flow guidance.

The other piece of our portfolio that represents and upside and offset the variability in this year’s portfolio is the Ag productivity business. In the first quarter, the segment gross profit was nearly $200 million higher than prior year. The upside is primarily driven by (inaudible) set pricing as a result of recent increases in generic prices and we were in a good position to capture some of the near term benefits. However, from an operational perspective, we continue to focus on our 300 million gallons of production and within that we will continue to drive our sales mix stores branded round-up sales.

Our strategy is clear. As we have said, we will be disciplined and maintain a level of premium over generics since we believe this cycle will ebb. With that discipline, we are in a good place as we expect the industry will ease back to a less elevated price band and we will come back to a more steady state Ag productivity GP range. In the short term, we expect the first quarter upside to largely carry through the year and we project our full year GP for the segment to be approximately $200 million to $300 million higher than our original target of approximately $1 billion.

Putting context, the first quarter Ag productivity GP growth effectively offsets the entire annual Brazil soybeans GP contribution.

If you take Seeds and Genomics and Ag productivity together, our increased guidance today reflects a step-up in combined full-year gross profit now in the range of $7.65 billion and that is a key element in building towards our confidence in our full-year outlook.

Moving now below the line for the quarter, the run rate for operating expenses keeps us in line for our full-year SG&A and R&D targets, so we continue to expect to see leverage as our spending grows at a slower rate than our topline. Importantly, the strengths of the first quarter also shows our free cash flow results. Quarterly free cash flow was $1.47 billion compared with $856 million last year. As Hugh indicated in his order book review that significant step-up reflects strong customer prepays in front of the US seasons. These prepays are a good indicator of the US purchase patterns and this reinforces my confidence in our overall US outlook. And while a large portion of the increase in Q1 free cash flow reflects the positive timings of prepays. There is no doubt that the performance in the business is also translating in to a better full-year cash flow outlook. As a result of that early step-up, I am confident as we raise our full-year free cash flow guidance to $1.8 billion to $2 billion.

Given the strong first quarter, let me briefly cover how I see the earnings cycle for the remainder of the year on Slide 10. We have seen a good portion of our growth in the first quarter. We were glad to see some growth from international regions like Latin America, this is a logical and a good indicator of the effectiveness of our strategy. Our most significant quarters will still be the second and third quarters and while there may be movement between the two quarters, we expect the combined Q2 and Q3 will also grow year-to-year as we are confident in the additional growth coming from the US in Ag productivity.

As I wrap up, I will leave you with two key thoughts on how I see the strong first quarter in forming our full-year opportunity. First, I am particularly pleased with the consistency that’s come together as a result of our portfolio. Very simply, we have been able to manage the variability in Brazil’s soybeans very much like we managed the variability in vegetables last year. We have strengths in other parts of the portfolio that don’t just allow us to address those downside variable, but also delivers upside that improve our full-year outlook. Second, it’s still very early but the first quarter is a strong start. This is a quarter that gives me confidence in our ability to deliver another year of growth. And even we have roughly 85% of the business still in front of us

Our ability to deliver another year of growth and even with roughly 85% of the business still in front of us. I’ll the position where we’re in to realize that fiscal year ’13 growth. With that let me give the remainder of the time to Rob for our pipeline update. Rob?

Rob Fraley

Thanks Pierre and good morning to everybody on the line. I’m going to jump right into the R&D pipeline update starting with slide four but these are the headlines. So first this is a record year with more phase advancements across crops and technology platforms than we’ve ever realized in our history. And if you take a look at slides five through eight you’ll see we’ve advanced 18 projects plus three additional projects moving into our ground breakers program. Second, if you look at the progress this year I believe that our R&D advantage is extending in important new ways.

We’ve just introduced major new platforms in integrated farming systems or IFS and our BioDirect research area and in addition on slide nine you see the geographic multiplier as removing technology from the original launch countries into successive new commercial markets faster than ever. The last point is that we’re positioned to launch a major new technology effectively every year through the end of this decade.

If you step back from the project by project detail, our R&D pipeline is more than the sum of its parts. It's the industry’s first integrated yield pipeline. In the next decade we plan to refresh every major platform creating incremental value and even better weed control, greater insect control and more opportunity to increase yield for our farmer customers.

The companies that are successful in the next decade will need to have more than one or two component technologies. The leaders will bring multiple technologies together in the seed, in the plant and in the field and no one is better positioned to do that Monsanto. So given all the advancements I don’t have time to go project by project so I’ll concentrate on highlights among some key themes.

And the first theme is that breeding is a cornerstone capability that differentiates us competitively and sets the tone for our emphasis on yield and nowhere is that success is more evident that in the annual U.S. performance results shown on slide 10. In corn the Dekalb yield advantage is strong as ever. In fact, the lower U.S. yields from the tough drought conditions magnified our relative performance, 2012 was no exception. With more than eight bushels per acre yield advantage rolling up to a three year average of 10 bushels per acre.

There is no doubt that yield difference was visible to farmers in their fields and now shows up in the order book that you just described. Our performance advantage was even stronger in soybeans where Roundup Ready 2 yield demonstrated a record setting yield advantage of nearly five bushels per acre. To put that in perspective that advantage is comparable to about 10 years of soybean breeding gains.

Farmers see this performance advantage better than anyone else and that’s reflected in the strength of our soybean early order book and confirms that Roundup Ready to Yield is our clear soybean platform. The additional data today is new data from our cotton results shown on slide 11. Like corn and soybeans the new cotton varieties we’ve launched are consistently out yield in the competitors.

You can see this geography by geography on the slide and when you take a weighted average total the Deltapine advantage is more than 6% that’s nearly 80 more pounds per acre or nearly $60 an acre advantage for Deltapine cotton over competitor seeds. Our breeding capability does more than drive an annual portfolio upgrade. It's also created completely new tools allowing breeders to unlock specific targeted breeding opportunities making the capabilities of modern breeding much more like how we have thought about biotechnology.

The case study is our Disease Resistance Breeding Program show on slide 12. We’ve completely revolutionized disease breeding using high throughput screening and markers to identify select and deploy disease resistance genes. Whether it's lay our value that we expect will drive our U.S. soybean opportunity in the near term before expanding internationally. So, the last ground breakers highlight is DroughtGard on Slide 19. Within DroughtGard, there are 3 significant firsts this year. It’s the first yield and stress system to ever launch. It’s the first ever ground breakers product in corn and it’s the first of the truly integrated breeding bio-tech and agronomic systems. And this means DroughtGard will move into commercial sales in 2013. So, you remember the initial opportunity for this product is focused on the Western Corn Belt where dry conditions are expected in most years on the approximate 10 million acres from the Dakotas to Kansas. However, this provides an important validation point as along with BASF, we’re launching the first product out of our yield and stress collaboration. The progress from DroughtGard, actually informs how we’re looking at a couple of the other projects in yield and stress shown on Slide 20.

The first is higher yielding corn. This project advanced last year and we’re on-track with our Phase 3 field testing. Now there is no doubt, that yield and stress is complex and we’re leveraging our collaboration with BASF to discover and advance more leads. We’ve also seen promising results in corn stack in multiple yield genes into a combined package. And I think this multi-gene approach to increasing yield is likely to become more prominent in the corn and soybean pipelines in the future. To that end in soybeans, we’ve also combined our work from our first generation higher yielding soybean project with that of our second generation leads into a combined next generation higher yielding soybean project, that’s in Phase 2. Based on our early work in this area, we see a multi-gene approach as an additional path, we want to explore for broad acre application in soybeans.

The last thing to highlight today comes from the new additions to the pipeline. Within our existing platforms, we’ve added four new projects shown on slides 21 to 24. These projects really reflect our technology leadership in action. As we are focused on third and fourth generation products, while most in the industry are still pursuing first generation technologies. The four products include the third generation intact to soybeans, I mentioned the bid earlier. Two new insect traits in corn and a fourth generation Bollgard IV[ph] products for cotton.

Let me focus on the two in corn where we’ve added new next generation traits for above and below-ground insect control. If you focus on our next generation above-ground insect control shown on Slide 21, we are increasing the control and durability against key caterpillar pest by developing VT genes with completely new modes of action. Importantly, these new genes will enhance above-ground insect control across our North and South American corn product lines. Finally, I’m really thrilled by our progress in discovering new cotton Rootworm genes, based on RNAi Technology. As you known last year, we advanced our corn Rootworm 3 product, which is phase 3. This year, we have added another novel, RNAi based product, corn Rootworm 4 in phase 1 and shown in Slide 22. We now have multiple modes of action beyond the traditional BT-genes. And that’s incredibly important since it solidifies the durability of our corn platforms and adds incremental new value. And that gives farmers more choices to use the technology that best meets their needs, while upgrading our systems with unique proprietary modes of action. So saving the best for last, we’ve also used our core-genomics knowledge to add two new R&D platforms this year. Biologicals and IFS.

I’ll start with our Biologicals platform on Slides 25 to 27. Here our lead technology is BioDirect and this is a milestone because we’ve officially brought BioDirect into our pipeline in the form of three project areas in early phase work. So, as you know, by understanding the genes in plants and pest, we’re able to take advantage of the advances in RNAi technology and naturally occurring processes to create topical applications from nature’s found -- from molecules found in nature. These can precisely target pests and can result in many of the same benefits we’ve seen with bio-technology traits. So while it's still in early stages I’ve to emphasize that for me this is a really exciting advance and it reminds of when I first saw the Roundup Ready technology in the late 1980s and when you look at the products coming out of our BioDirect technology I believe that these can facilitate expedited regulatory approvals, lower cost product development and ability to benefit markets where biotech traits aren’t allowed today.

We see a lot of broad applicability and we’ve taken our first step towards advancing these products with our first application of BioDirect technology for glyphosate-resistant weed control moving into Phase I. Right behind that are projects for insect and virus control that officially entered the discovery phase of the pipeline. So given these are early stage there is still work to do but as you can see from the photos on these slides the results are extremely exciting. So we’ll continue the development work but this is definitely a breakthrough technology advance that can create significant value in the next decade.

The same breakthrough platform potential applies to IFS which is our last highlight on slide 28. It's the first of our new platforms to move into groundbreakers and this year there has been a tremendous amount of R&D progress. You know, I spend a lot of time with growers and inevitably the conversation gets down to the heart of IFS and how they can get incremental yield out of their seeds and fields more consistently.

Given our investment in Genomics we’re now able to correlate Genetics to different field, soil and geography compositions giving us the ability to position hybrids with a higher degree of probability that has ever occurred in the industry.

And this allows us to prescribe the optimum hybrid that best fits in a field backed by a sophisticated planting density algorithm which we call field scripts to drive incremental yield. Here is why we believe in the opportunity and the value of IFS. In a drought year like this one we knew if we can differentiate our prescription we would have something special and that’s exactly what we saw. We realized between a five and 10 bushel yield increase with our FieldScripts prescription versus the best practices of some of the most accomplished growers in the U.S. And that’s really key, five to 10 bushels for a corn grower is significant and that creates opportunity for value creation and value sharing between ourselves and the grower and that allows us to move into ground breakers this year and sets up for commercial launch of FieldScripts in our Dekalb brand in 2014.

So I know we’ve covered a lot let me bring everything together for a quick summary on slide 29. So first, we’re the technology leader and the bottom-line in this industry is all about creating yield sustainably and our focus and investment in producing yield is what makes our R&D pipeline as unique and successful as it is.

And when you look at our pipeline I think what’s impressive isn’t necessarily the pure number of projects or advancements, what really matters is that you can see a steady stream of upgrades that means more yield and value for farmers and that drives the business opportunity for Monsanto. Second, we’re unlocking yield gains via totally new technology platforms. The ability to combine Genomics, biology and data management capability is driving yield in spectacular new ways.

We’re on the leading edge of that and as the first mover in this space we will roll out platforms like IFS and BioDirect that I think are game changing opportunities for farmers and our industry. And finally we don’t take our technology leadership for granted and we’re looking to accelerate and extend our R&D leads. Our investment and integration leads to big breakthrough’s, consistent upgrades and entirely new platforms reflecting that there is great breadth and depth in our pipeline than ever before. Into this point you know we expect to bring out a major new technology effectively every year through the end of this decade. I’ll tell you I’m as excited as I’ve ever been with our R&D pipeline and that translates to our confidence and tremendous long term outlook for farmers and our business.

So thanks for your time and with that let me turn it over to Bryan for the Q&A. Thanks.

Bryan Hurley

Great, thanks. With this extended conference call to accommodate the R&D update we plan for some additional time for questions as well. With that we would now like to open the call for questions. And 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 are always welcome to rejoin the queue for a follow-up question. So with that Dan I think we are ready to take questions from the line.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kevin McCarthy of Bank of America Merrill Lynch. Caller, please proceed with your question.

Kevin McCarthy - Bank of America Merrill Lynch

Yes, good morning. My question relates to soybeans in Brazil and specifically the nexus between your Intacta launch, the pending litigation on POD or value capture system. I am wondering if we think about that issue, does it relate strictly to the Roundup Ready 1 soybean technology? That is to say, is there any scenario under which you would be unable to capture value on the backend for Intacta as you proceed with the launch of that product in coming years?

Hugh Grant

Kevin, good morning and thanks for the first question. The dispute focus is exclusively on Roundup Ready 1 and within Roundup Ready 1 it focus is on patent life. So, our belief is the patent, like the US, expires in 2014, there is some of the groups in Brazil believe that it has expired already and that’s the nexus of the argument. If you kind of kick up us there, the philosophy I have applied to this is it’s the same principle as before. If we can reach a business solution then that would be far more preferable and the over action principle in this is maintain the freedom to operate so that we get Intacta launched on time and that we maintain our collection system in Brazil. So, the focus is exclusively on one but the value in Brazil going forward is two things, the value in Brazil going forward is the incremental yield that Intacta will unlock, number one. And number two, it’s the amazing cotton performance that we are seeing down there. So, we would like to cleave [ph] and get Intacta launched then keep driving our cotton business forward.

Kevin McCarthy - Bank of America Merrill Lynch

Great. And then as a quick follow-up, if I may, on Argentina, it’s the establishment of a value capture system for biotech soybeans in Argentina dependent on resolving the Brazil situation, perhaps you could update us briefly on prospects there?

Hugh Grant

No, they are not linked. We are making good progress, in fact, compared to the last 10 years I am very encouraged with the progress that we are making in Argentina. And as growers have seen this 4 bushel or 4 bushel plus yield increment, there is a lot of appetite for us. So, I think we have seen more movement in Argentina in the last 6 to 12 months than we saw in the last decade, but it isn’t linked (inaudible) from Brazil today.

Kevin McCarthy - Bank of America Merrill Lynch

Very good, thank you.

Hugh Grant

Thanks for the questions.

Operator

Our next question comes from Mark Connelly of CLSA. Caller, please proceed with your question.

Mark Connelly - CLSA

Thanks. I am thinking back to what you said, Hugh, about vegetables becoming the number three part of your portfolio over the next couple of years. As we look at this pipeline, we see vegetables come up multiple times. Should we think about the vegetable opportunity as a serious of discrete big product opportunities like broccoli or like tomatoes, or should we think of it more as taking the wholesome as line and upgrading it in more of an evolutionary sense?

Hugh Grant

Yes. It’s more the lesser than the former Mark. I think there is half-a-dozen crop species in there that were really matter to us. I don’t think it’s blockbusters as much as discrete breathing improvements across the half-a-dozen species. But compared to how we started, you go back a year and you look at how we started last year and this year, I feel a lot better about the trajectory on vegetables this year than a year ago.

Mark Connelly – CLSA

Okay. It’s very helpful. Thank you.

Hugh Grant

Thanks.

Operator

Our next question comes from Vincent Andrews of Morgan Stanley. Caller, please proceed.

Vincent Andrews - Morgan Stanley

Hi, thank you and good morning everyone. Actually, I kind of have the same question for you this year that I had a year ago, which is about your deferred revenue, which again, is more excessively up more than 40% and I guess could you just talk to us a little bit about what’s driving that increase, how much of it is used in traits versus what’s happening, I know you give I know you chemical guidance on gross profit for the year, but what is getting that number up so high. You had also talked last quarter about there been some pull forward out of 2Q into 1Q in the U.S. business or maybe you could just sort of help us dimensionalize this $2.8 billion number. I mean it's really up $800 million year-over-year it's pretty impressive.

Hugh Grant

I remember it from a year ago, maybe ask Pierre just to recap a little bit of the context in the quarter and also the deferred revenue as well.

Pierre Courduroux

So Vincent definitely the increase in prepay is linked to the seeds business and mostly I mean most of it is linked to the seed business in the U.S. so that’s definitely what it is and we read that as a very positive indicator supporting our Dekalb, I mean that’s certainly a very strong signal there. However I mean as we said last year and I think the rationales feel the same, I think what it demonstrates that the interest to farmers towards our product, their willingness to commit, their ability to deliver with cash which is a great thing because there is lot of cash in the Ag sector right now but as long as there has not been anything planted in the U.S. at this point in time. I mean we don’t want to read too much in this indicator. It's certainly a very strong signal and we feel very good about it and it's been one of the reasons we felt even at this early stage we could raise our guidance but we don’t want to read more into this high number than what we I just said.

Vincent Andrews - Morgan Stanley

When you talked about the guidance as it relates to seeds and traits I kind of got this sense from your comment that you were really just raising the seed and traits portion of the guidance based on your performance in Latin America and not based on the U.S. Did I hear that correctly?

Pierre Courduroux

What I just said was because we see a strong order book in the U.S. we feel comfortable with our planning assumptions there. We’re not seeing significant upsides there versus our guidance. And remember Vincent the way we look at the guidance is we look at the guidance as a whole and what we do every time is we look at all the indicators around the globe and we feel aggregate that we’re in a good place and obviously feeling good about the U.S. at this point and there is an important element but it's not driven by that.

Operator

Our next question comes from Jeff Zekauskas of JP Morgan. Caller, please proceed with your question.

Jeff Zekauskas - JP Morgan

In the United States you were planning to increase your penetration of your Genuity product line corn by about 10 million acres and that divides into doubles and smart stacks and VT Triples. Where are the larger incremental acres coming from off those three that is the fastest growth in smart stacks or doubles? Sort of what’s the faster growing product line? What’s the slower growing product line?

Hugh Grant

It's kind of interesting and it's one of the penalties that comes with increase in guidance in the first quarter. So we’re 15% in the year we’re still looking to see them grounded in several months’ time. But if you look at the order book and you look at which is just tracking well with the projections, across that family we see good growth or increased growth in smart stacks probably followed by double in a nice list, double has become a very important product for us and they taper down the decrease and you know intentionally is in the triples platform. So to your question I would say smart stacks up, double is up close behind it and triples phasing down in the overall mix.

Jeff Zekauskas - JP Morgan

That’s very helpful and then quickly for Pierre, the tax rate in the first quarter is usually in the mid-30s and here in the mid-20s. Sort of why is that and have you changed your tax guidance for the year?

Pierre Courduroux

No we have not, this is linked through a one discrete item related to some entity restructuring within Asia, this is a one-off discrete item that’s driving the tax rate down for this quarter and being a small quarter it doesn’t have it doesn’t have an impact on the full year end was part of our planning assumption. So it definitely shows up in the first quarter but it's not something that’s going to be material for the full year.

Operator

Our next question comes from Don Carson of Susquehanna Financial Group. Caller, please proceed.

Don Carson - Susquehanna Financial Group

Question on your guidance, you bumped up your gross profit guidance Pierre by 100 million but Ag Productivity is up 200 million to 300 million. So what whether it's a reduction in Seeds and Genomics, is it all in the Brazilian soy royalty collections? And of that $0.20 to $0.25 full year hit on Brazil, how much did you take in the first quarter?

Pierre Courduroux

So, definitely Don, the difference – I mean, you pretty much answered the question, the difference in the guidance is definitely coming from Brazil soybean is the $0.20 to $0.25. As far as the first quarter is concerned and soybeans are concerned, a fairly large part of the year-to-year reduction we are seeing in the first quarter is linked to Brazil and the soybean business.

Don Carson - Susquehanna Financial Group

And of your increase in Ag productivity, is that all US branded price or is there a mix benefit there too, or is there some volume growth that you are anticipating?

Pierre Courduroux

It’s a combination of everything. So, we have got more volumes in the first quarter than we had last year with some small volume and we got price benefits all around the globe, including as you mentioned, mixed benefits.

Don Carson - Susquehanna Financial Group

Thank you.

Pierre Courduroux

So, it’s a whole thing.

Hugh Grant

So, if you have thought about it Don, on our price bands of $8 to $10 a gallon, we are probably broken through in the $10 to $12 range, is that Pierre, I would guess.

Pierre Courduroux

Yes.

Hugh Grant

So, it’s not a lot, but it’s a nice uptick, and it puts us back in the same band that we have been striving to reach versus generics.

Don Carson - Susquehanna Financial Group

Thank you.

Operator

Our next question comes from Michael Piken of Cleveland Research. Caller, please proceed.

Michael Piken - Cleveland Research

Yes, hi, good morning. I was hoping to get an update in term of the approval process on Intacta in China.

Hugh Grant

Yes, thanks for your question. As you mentioned in your question, we need a final sign off in China before we start planting in the US. So, China has gone through – before we start to plant in Brazil, China has gone through change in leadership. Chinese New Year is coming up, so we have never forecast regulatory events. But, as we say here today, we are still feeling comfortable on the timelines that we would get the seeds planted in Brazil in the fall of this year. So, if you think about it, they are kind of seasonal, so their spring is our fall. So, as we look out from now, that seed will be moved to the farm the backend of 2013 and given that we still feel good that we are in line, given the changes in China, we are in line for the regulatory events that occur.

Michael Piken - Cleveland Research

Great. And then, have you guys given any sort of detail or color more recently in terms of your pricing for Intacta, how that might compare with what you charge for the old roundup products?

Hugh Grant

No. We have been – and that’s been one of the benefits of this ground breakup program. We have been consistently demonstrating 4 bushels or more of incremental yield, which creates about $80 something of new value, if you take the machinery used for spraying time and just the pure yield, that’s the $80 that the Brazilian growers never seen before versus Roundup Ready 1. So, the value proposition versus 1 is significantly higher and the appetite in the grower community also runs very high. So, again, it’s not $80 plus of value that will be pricing the new Intacta, but we haven’t declared it yet.

Michael Piken - Cleveland Research

Okay, thanks.

Hugh Grant

Thanks a lot.

Operator

Our next question comes from Frank Mitsch of Wells Fargo Securities. Caller, please proceed with your question.

Frank Mitsch - Wells Fargo Securities

Good morning and happy New Year, gentlemen.

Hugh Grant

Happy New Year to you, Frank.

Frank Mitsch - Wells Fargo Securities

Thank you. Following up on the little bump you are getting on the roundup side, with generics staying a little bit of an elevated level here. How long do you anticipate that lasting? When would you anticipate that to cycle back down to more normal levels?

Hugh Grant

Frank, I think the final on what the new normal level is it’s difficult. But I think, this is a cyclical business. We do compete, you know, we are kind of 50-50, and we compete against Chinese producers. So, here is the difference versus the last time, which is maybe for your (inaudible). We have stripped a lot of cost in this business. We have collapsed SKUs and we changed our business model completely. So, I think we are a little more agile, nimble, and ready for the downturn when it occurs. And the premium that we are charging versus the Chinese is still very moderate. So, I think the key in this, given the unknown of when the cycle change, the key is stay realistic in your pricing and watch very carefully where the Chinese material is priced at. So, I don’t know what the cycle time is, but we have been very diligent and disciplined at how we track that.

Frank Mitsch - Wells Fargo Securities

All right so it's continuing for the near term, there is no change and then you’re at a record net cash position right now. What do you plan on doing with all that money?

Hugh Grant

It's a great probably we have Frank and I think our overall approach remains the same, I will maybe ask Pierre to say a few words in repatriation but we’re only in Ag. This is our space, this is the only thing we do. So reinvest in that cash, share owner’s cash in the space is kind of job one for us. Absent M&A and absent those reinvest opportunities then we will be more aggressive in repatriation and terminate the owners and Pierre maybe a few words on that.

Pierre Courduroux

And we’re obviously considering our options at this point in time but as you mentioned I think our goal number one is obviously to grow our business internally or externally and then the next step obviously is to return cash to our owners because we’re very happy with our balance sheet. Our balance sheet gives us a lot of flexibility versus a downturn and to grow our business as well. So now we’re focusing on returning cash to our owners over the last two years, we’ve returned about $2.2 billion and we’re definitely committed to returning cash and as I mentioned we’re considering all that options right now.

Operator

Our next question comes from David Begleiter of Deutsche Bank. Caller, please proceed with your question.

David Begleiter - Deutsche Bank

On the strong U.S. order book any sense of any competitor? Supply constraints helped the U.S. early orders and looking into the full year there is a strength in create your confidence and gaining even more share in U.S. corn and seed in 2013?

Hugh Grant

David thanks for the question, in terms of competitive dynamics it was a season that started early, it was an open fall so the pace of the season. In many ways it resembled the year before because farmers go harvest on early because of the drought, there was a lot of focus on securing their first pick on seeds. So I think for Monsanto competitor it was a high velocity backend to the year. We did something a little bit different last year compared to what we have done in years gone by.

Our estimate, our projection for the coming season is 96 million acres which is pretty bold but as I look at the order book you know our assumption will be that with the insight that the order book gives us which is that early look. We feel pretty good with 95 million acres and we feel very good of our ability to supply against the mark of our own that size.

But it's funny because we’re speculating on what the heck happens next spring and as you know so much of what happens next spring is really determined by climatic conditions. So I think we’ve nailed a flag on 96 and we know you know everything that we’ve sold and look at the order book, we feel good against that number.

David Begleiter - Deutsche Bank

But just on U.S. market share in 2013?

Hugh Grant

I would rather get a crop planted but we feel good with where we’re.

Operator

Our next question comes from Bob Koort of Goldman Sachs. Caller, please proceed with your question.

Bob Koort - Goldman Sachs

On the Brazil, I hate to keep beating on that one but I guess the $0.25 dividend merits a little more inspection. You guys had mentioned opportunity to collect royalty there and put them in Escrow. The approach you’re taking now for some sort of moderated agreement preclude you or change your strategy there and where does that cash if you do take those Escrow account you built that Escrow account and lastly can you help us on that $0.25 the cadence through the year as most of it at the back-end at harvest, is it distribute throughout the year? What should we expect in terms of subtracting out $0.25 for the year?

Pierre Courduroux

I would say it's all on the table at this stage Bob. As I mentioned in my comment we’re in advance discussion so I think we’re well down the track with some of the grower groups in Brazil and we’ll, so while we’re in those discussions it's hard to answer your question but we’re looking at business solution of this that gives us increased certainty on getting in Intacta launched and increased certainty on maintaining our collection system. And that’s what has really been driving the negotiations in Brazil and frankly that is a two-way street between us and those grower groups. Here is the last piece of the estimates, maybe this helps. There is no such thing as a soybean grower. So, the guys who are growing the soybeans are the same ones who are buying and planting our corn. So, getting this resolved in a business friendly manner and driving the record adoption of our corn hybrids would be the definition of good day I think for both of us, and the grower. So, that’s how I’m trying to thread the needle on this at the moment.

Bob Koort - Goldman Sachs

I am sorry, if you could follow up on, I mean it still sounds a bit cryptic to me that if intact is as strong as you say it is, there is should be no problem getting paid and it is not a IP issue. It sounds like your saying you need to keep the way you get paid (inaudible) to launch, does that mean just getting some modest income in order to ensure that system is still running smoothly or what do you mean by making sure the intact to go smoothly.

Pierre Courduroux

Just let me, I don’t mean to be cryptic. It’s just hard to have a discussion on the line and we’re also discussing this with a grower group from Brazil. The opportunity and intact is significantly greater than any opportunity we’ve seen in Roundup Ready 1 because it creates much more yield and with the insect control that it delivers it’s a revolutionary new product. So, as we look at the Roundup Ready 1 problem, we’ve tried our best to find a solution Roundup Ready 1 that guarantees our commercial delivery and our success are intact and on maintaining the collection system in Brazil and those have been touch points in these negotiations and the reception of that conversation has been very good with the Brazilian grower groups as well. So, that has been the principal we’ve applied to this.

Bob Koort - Goldman Sachs

Great, thank you.

Operator

Our next question is from P.J. Juvekar of Citigroup Collar, please proceed with your question.

P.J. Juvekar – Citigroup Collar

Yes, hi good morning. My first question is for Rob. Rob, with IFS you got the 2013 ground breakers trials. Can you talk about how do you price for these FieldScripts. Is this an annual buy, and the reason I’m asking is, a typical grower feels that he knows his farm better than Monsanto. So, how do you convince that grower and do you need additional marketing dollars?

Pierre Courduroux

Great question and Happy New Year. On the overall which we’re still looking at the pricing and delivery options, I think while we’ve generally heard back from growers as we’ve done our pilot studies and grower group focused sessions is up, they want to see the technology priced incrementally to the seed, so they know exactly the cost. We’ve been thinking about it as a one year pricing and we’ll clearly be sharing as we typically do the, the value created with the technology. I mean, I view IFS just like I would any other yield trait. It intrigues[ph] it’s incremental yield and well, and if a grower can see a 5 to 10 bushel per acre boost with this technology, they’ll certainly reward us with our fair share and they’ll be happy with their incremental gain. I think the other important thing that we’re seeing is, and again to the heart of your question is, there is a lot of interest with growers because they played around with various forms of precision farming, they’ve looked at maps, but none of them have worked and been easy.

And I think the beauty of our system is, it’s worked and has been demonstrated on the farm in the hands of some of the best growers in the country and that’s really exciting. I think the last point I’d make on IFS is we see it as the business that renews itself annually because environmental conditions change, farmers switch fields, there is different histories of moisture and fertilizer and disease, and so we’re quite excited. And as I said in my talks, the fact that in a tough drought year, we were able to see that incremental value is really exciting and I think farmers interest in using best practices to take their data and optimize it and optimize their yields is right on target.

P.J. Juvekar – Citigroup Collar

Thank you, and quickly on Latin America. You are price lifting corn in Argentina seems much lower than Brazil. So, what can you do to raise profitability in Argentina and do you need the POD system in place there, to improve the profitability? Thank you.

Hugh Grant

I don’t think there is a difference P.J. I think what you’re looking is at doubles versus triple so it's product line-ups or a platform played by the general approach in pricing I think it's pretty synonymous between the countries.

Pierre Courduroux

I mean the logic is very similar and the rational is very similar as well and as you mentioned it's just the step of evolution in the build of the portfolio that’s different in Brazil and Argentina but going forward we’re very confident that they are still go on an track together in terms of the logic of our pricing. So I don’t see that as a difference actually.

P.J. Juvekar – Citigroup

So you’re saying that doubles in Argentina and doubles in Brazil are similar and then triples in Argentina are higher than doubles in Brazil?

Pierre Courduroux

No the way we built our pricing and the way we built our pricing increases is similar. Remember it all depends obviously on the agronomic conditions on the benefit of the trait in the given region but the logic of how we price and how we raise price is very similar when we introduce a new trait. So depending on the benefit of the trait in a given geography will eventually price it differently but we always have the same philosophy of pricing there.

Bryan Hurley

This is Bryan Hurley, I can maybe add a little bit of clarity there. In terms of the evolutionary stage in Argentina we’re making that step-up from the double to the triple. In Brazil you’re making the initial step-up either from no-traits to double-stacks and then moving on to triples. You’re in a faster phase of ramp-up or a bigger magnitude of ramp-up in terms of where you’re in Brazil versus the increments that you’re doing just doubles to triples in Argentina but it's exactly the same pattern and it's exactly the same pricing philosophy that Pierre outlined. It's just a different point in time.

Operator

Our next question comes from Bill Carroll of UBS Financial. Caller, please proceed.

Bill Carroll - UBS Financial

Another question on Ag Productivity, you mentioned that you expect a more steady state environment at some point that you’re just uncertain as to the timing but I’m wondering what you’re thoughts are in terms of how a supplier response may come. Do you think it may come from the smaller players who exited the business in the last industry shakeout or will come from the larger players given that it seems that there is more stringent environmental standards that are being adopted in China in that business.

Hugh Grant

It's hard to recall but our guess would be or our assumption is that it would come from the small players who go off stream and then come back on-stream there is a lot of vessels lie empty or the remotely purpose vessels that are switched on and off are used for our things and when you’re getting that oversupply you see prices slumping and we have been watching imported material and been very vigilant on tracking those prices but I think to your question is some of the smaller producers, the larger ones are taking a lot of more care now and weeds treatment and their environmental practices and that’s impacting their costs as it should.

Bryan Hurley

I think even with the extension here we probably should have time for about two more questions.

Operator

Our next question is from Laurence Alexander of Jefferies & Company. Caller, please proceed.

Laurence Alexander - Jefferies & Company

Just a quick clarification on the your works and negotiations. Do you have any insurance recoveries to cover the development there? And I guess is it reasonable to expect I wonder the settlements you can pull back to full $0.20 to $0.25 or is that still up in the air?

Pierre Courduroux

We don’t have any insurance regarding this part of our business and as far as the $0.20 to $0.25 this is the range we’ve been giving and as you were saying I mean we’re in the negotiation and we’ll keep you informed as soon as we get more information there.

Operator

Our final question comes from Michael Cox of Piper Jaffray. Caller, please proceed.

Michael Cox - Piper Jaffray

My question is on the maybe a bit conceptual but Argentinian adoption of triple-stack, it's a 40% in year two. Could you, perhaps maybe frame up your expectations of how you would see Intacta playing out in Argentina given that strong adoption that you have seen just over the past couple of years in corn traits.

Hugh Grant

Yes it's a great, it's a good question. I think our assumption is the adoption of Intacta in Argentina and Brazil will be two of the fastest crops that we’ve seen in the last 15 years and the reason for that is 1) Large farms. 2) They were rehearsing for a long time, so they have been waiting on this technology. So, I can emphasize enough the anticipation for getting this into the fields. 3) Is a yield boost in beans that has never been seen in Argentina or in Brazil a time when beans a premium price. So, we expect that the curve in both of these countries will be very aggressive and that is why it kind of comes with few other question today and that is why solid resolution on this Roundup Ready 1 dispute and clearing the past for intact and ensuring that we maintain our collection system, it is so incredibly important. If you look at Roundup Ready 1 Beans today it is about 3% of our gross profit. If you look forward and the value that is created by corn in Brazil and Argentina and the value that will be created by the impact of launch given the velocity of those curves that is a big piece of the future of this business. So, thanks for the question.

So, maybe I’ll – Bryan maybe just a quick word, has been an extended call, so let me thank you for your patience and your support and wishing you all the very best in this New Year. There is no doubt that the first quarter was a very strong quarter for us and as Pierre made the point, it gives us the data points that reinforces our 2013 opportunity, in the near term and is still early days, but the near term we’re seeing momentum from the growing Latin American opportunity as well as our core business in the order book in the U.S. and that has reflected in our confidence in raising guidance at this early point in the year. Beyond this year, we’ve increased our focus on being the yield company and delivering valuable yield to our customers, that is what they expect of us and that shows in our strategy, that shows in our products and that shows in the pipeline that Rob shared with you today. Putting matters[ph] to the grower his yield and I tell you today I believe we’re in the best position to deliver that yield with expanding our competitive lead and that is what drives our opportunity in the long term. So, again all the very best to you and yours as we start the New Year. Thank you very much.

Operator

This concludes today’s teleconference. You may now disconnect your lines at this time and thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!



More From Seeking Alpha

Rates

View Comments (0)