Monsanto's (MON) CEO Hugh Grant on F3Q 2014 Results - Earnings Call Transcript
Monsanto Company (MON) F3Q 2014 Earnings Conference Call June 25, 2014 9:30 AM ET
Executives
Bryan Hurley - Investor Relations
Hugh Grant - Chairman and Chief Executive Officer
Brett Begemann - President and Chief Operating Officer
Pierre Courduroux - Chief Financial Officer
Analysts
Vincent Andrews - Morgan Stanley
Kevin McCarthy - Bank of America
John Roberts - UBS
David Begleiter - Deutsche Bank
Don Carson - Susquehanna
Chris Parkinson - Credit Suisse
Mark Gulley - BGC Financial
Dan Jester - Citigroup
Tim Tiberio - Miller Tabak & Company
Carly Mattson - Goldman Sachs
Robert Koort - Goldman Sachs
Joel Jackson - BMO Capital Markets
Michael Piken - Cleveland Research
Jeff Zekauskas - JPMorgan
Operator
Greetings and welcome to the Monsanto Company Third Quarter 2014 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Bryan Hurley, Investor Relations lead for Monsanto. Thank you. Mr. Hurley, you may begin.
Bryan Hurley - Investor Relations
Thanks a lot, Kevin and good morning to everyone. Thanks for joining our third quarter earnings update. As usual, 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 on both a GAAP and 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 on the website.
This call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risk and uncertainty, the company’s actual performance and results may vary in a material way from those expressed or implied in any forward-looking statements. A description of the factors that may cause such a variance is included in the Safe Harbor language in our most recent 10-K and in today’s press release.
So, this morning, we have built our update around the opportunity we see for Monsanto’s long-term growth, including some key announcements around our growth targets, our strategy and the next important step in our capital structure. While we will focus on our longer term growth horizon, let me anchor the conversation with a couple of key results on Slides 4 and 5. Ongoing earnings for the quarter were $1.62 per share. And with those Q3 results in hand, we have the clarity on the remainder of the year and we have raised our outlook to the upper end of our original guidance range for ongoing EPS and free cash flow affirming our full year growth this year. With this quarter, we continue to see our Seeds and Genomics segment as the largest contributor to that full year growth and we continue to make incremental progress on our overall GP contribution, margin expansion and in our ongoing EBITDA.
So with that, let me hand it to Hugh to take us through the updates this morning and the next steps in our strategic outlook.
Hugh Grant - Chairman and Chief Executive Officer
Thank you, Bryan and good morning to everybody on the line. While we always take a look forward in Q3, today we take a bolder approach. Most importantly, we are defining our growth strategy over the next five years and we are beginning to truly use our capital structure more aggressively. In the last year and a half, we have crossed several key business milestones that give us a new level of clarity and confidence and how we see our global growth over a multi-year runway. We have just completed an update of our strategy. The clear conclusion, we see a unique combination of core growth, new platforms and the opportunity to better leverage our capital structure. There is a lot of news in our announcement today.
Let me walk you through each element starting on Slide 6 and tie the headlines to my strategic priorities for our company. First, we are unlocking the next evolution in our strategy. We are not simply a seed company. Today, we are providing multiple solutions to farmers by delivering improved yield technology and the seeds in the bank and in the fields. That translates to a compelling vision of how this industry can expand yields and productivity through the convergence of biology, technology and information.
As farmers become increasingly digitized, information on specifically platforms like precision agriculture becomes the integrator expanding from our core seed business to create opportunity to optimize yields across the 40 plus key decisions that farmers make every season. There is no company better positioned to lead this evolution. That’s who we are. And just as we led the seeds revolution, we are driving the industry to expand the view on how we deliver yields and productivity to our grower customers.
The second point I would emphasize is on Slide 7. With such a compelling vision, we are willing to back our confidence and long-term growth with a new target to at least double our ongoing EPS over the next five years. We haven’t laid out multi-year targets for the past several years. Doing so today is evidence of the confidence that we have in our core business and the transformational potential in our growth platforms. It’s also backed by our focus in our farmer customers and the success that we have had over the past few years as farmers have responded well to our effort to provide more options in value with better performing products.
We believe we have positioned ourselves to sustain the mid-teens plus EPS growth, that’s been our hallmark through a full decade. The ability to target continued growth at that level of a revenue base in the range of $15 billion speaks to the debts of the Monsanto portfolio and the magnitude of the opportunity that our strategy unlocks. The foundation of our confidence is our core business. And as we have listed that outlook to the high end of the guidance range today, we see as an important proof point. Our core business performance is allowing us to deliver our growth commitments and the toughest ag environment in the past several years. Within that, corn certainly has been more challenged by the industry headwinds of declining acres, a tougher commodity environment and direct currency effects, but it’s still a source of expected full year growth in our portfolio.
With some of the macro shifting, soybeans have emerged as a true fiscal year ‘14 highlight delivering record growth that foreshadows the opportunity ahead in the decade of the soybean. So, despite a year where commodity price is reset, corn acres declined in the world’s biggest regions and global currencies became a significant headwind. There is no hesitation. We see seeds and traits delivering a majority of the full year growth to back our guidance. And that performance is a key proof point of our portfolio balance that turns into opportunity as we see this core seeds and traits engine delivering more than $4 billion in total GP growth as the largest driver in our five-year target.
The third key point I would emphasize is on Slide 8, our plan to return an additional $10 billion to our shareowners over the next two years, which is another important expression of our confidence in Monsanto’s long-term growth. Today, we have announced a major step forward that allows us to use the strength of our cash generation and balance sheet. We are now targeting a net debt to EBITDA leverage ratio of 1.5 by the end of fiscal year ‘15. That level would reflect the seasonality of our business, but importantly, it takes our balance sheet from a negative net debt position to one providing an opportunity to use our capital structure and return significant cash directly to shareowners.
Over the past year and a half, we have been working in this plan as we have passed several key business milestones and we move quickly to get to our target level. One of our first capital allocation priorities will be a new two-year 10 billion share buyback program with an expected accelerated share repurchase of approximately 6 billion in the near-term.
And that leads to my final point, with everything that we have assembled today, the roadmap for our growth is as clear as ever. Brett will describe this in detail, but our future growth is enabled by three key elements. We are a global company that has strong embedded organic growth, where a company that’s building transformation on new platforms with compelling growth prospects and we are a company that now intends to use our powerful cash generation and capital structure to compound growth and key value for our owners.
One of the most exciting elements of that as we are now a pivot point for our new platforms start to deliver real growth. These are platforms that we expect will form a key part of our earnings profile in the next five-year period. And this will be one of the focal points of our summer field event as we host our Whistle Stop Tour VII this August. The springboard this year has actually exceeded our initial plans as we have more customers and more acres on all of our Climate Corporation platform products and services. That in turn provides an early confidence point for the ramp up over the next few years for what we see as a transformational platform.
We will outline our specific expectations for the fiscal year ‘15 outlook as we closed out this fiscal year, but fundamentally, we certainly see fiscal year ‘15 as the beginning of the next half decade of growth. At no point have we this much clarity on both the opportunity ahead as well as on the roadmap that gets us there. We are a company that sees growth five years down the line and that’s compelling. We have the strategy, we have the tools and we are focused on delivering.
So with that, let me give the time remaining to Brett to give you the deeper dive into our business platforms.
Brett Begemann - President and Chief Operating Officer
Thanks, Hugh and good morning to everyone on the line. Our confidence in committing to a long-term growth target is a function of both our core business and the new platforms to strengthen our growth opportunity. On Slide 9, you will see that confidence has increased as we have delivered a handful of critical milestones over the past year and a half. Those range from the reinvigoration of our soybean platform with the launch of Intacta and our agreement with DuPont to the establishment of new growth platforms in precision ag and biologicals. Those milestones set the roadmap to our growth on Slide 10.
We believe we have de-risked some of the biggest factors crystallizing our line of sight on what drives our opportunity. That obviously has a start in fiscal year ‘14. It is clear that what we needed to demonstrate this year was that our seeds and traits business is returning as the biggest driver of our growth and that’s on track.
As we walked through the elements, let’s start with corn. Despite continued softening across the macro environment, we expect corn to be a source of full year growth and part of the seeds and traits rebound. That’s highlighted by the most strategically important drivers. We are seeing good price mix lift driven by our portfolio upgrades in all regions and we have seen the COGS improvement we anticipated highlighted by the U.S. That’s even more meaningful in a tougher macro environment. For perspective, this year, corn acres have come down in the Americas by about 5% and currency reflects an incremental headwind to our business of roughly another 3%. Those factors have tempered some of the upside growth this year, along with continued volatility in the Ukraine and some incremental effects in Latin America. There was widespread rain and flooding in Argentina that has significantly reduced our production yields, resulting in much higher costs in the current sales season. Likewise in Brazil, our largest competitor has acknowledged it had some challenges with insect resistance to its key traits making some late pricing adjustments across the current market. Those are all realities of the current macro conditions.
We work through variations every year. We have made our adjustments and we feel good that our global corn portfolio allows us to continue to grow even in a year like this. Our portfolio clearly positions us well for some of this macro shifting and you see some of the corresponding positives in soybeans, where we are on track for record growth this year. That includes both the pure pickup in the core business as planted acres favor soybeans as well as the compounded benefit from drivers that we expect to elevate the earnings power of this platform over the next few years, notably Intacta in Latin America and the overall Roundup Ready to Yield platform in the U.S. The rest of the portfolio is effectively where we expected and complementing the bigger corn and soy engines.
In cotton, there has been a little pickup in U.S. acres that offset a bit of the declining acres in Australia. And in vegetables, we are now tracking with the turnaround in revenue and gross profit contribution we anticipated for the full year. Delivering in this tougher environment pressure tests our strategy and validates the value of our portfolio and that culminates in how we see our growth setup for the next five years. To be clear, we expect the largest driver of our overall opportunity through 2019 is growth in the core seeds and traits business. In that time, we expect to deliver more than $4 billion in new total gross profit growth.
There is a no better example of that opportunity and earnings power than the emergence of the soybean platform on Slide 11. It’s a platform with the fastest expected rate of growth in the next five years. With the progression of Roundup Ready to Yield, Intacta and Roundup Ready Xtend, for the first time, the soybean platform mirrors the multi-stack rapid upgrade opportunity in our corn business.
The most visible proof point is Intacta on Slide 12. Today, we take the early step in what we see is the fastest historical ramp of any soybean trait. The full supply availability is still coming together as weather has delayed harvest in Argentina and we work through the qualification process given the end season drought in Brazil. So, while it’s early, we are very comfortable being able to target 10 million to 12 million acres in the upcoming season. That’s our biggest second year step up in soybeans. It’s three to four times the reach of this year’s launch and twice the level that we saw with the ramp up of Roundup Ready to Yield in its second year. That’s a clear validation of Intacta’s performance and the opportunity.
The majority of this next year’s expected step up will be in Brazil, but we will also begin commercial launch across Argentina, Paraguay and Uruguay passing another key strategic milestone in this 100 million acre opportunity. That catalytic opportunity in soybeans is backed by the continued growth and expansion we see in our biggest platform, our global corn business. More than half of our seeds and traits revenues are driven by corn reflecting the opportunity across multiple layers and multiple geographies. This is an extension of growth we have proven for the past decade, including portfolio upgrades, our expanded footprint and continued trade opportunity all of which drive our mix and volume.
The biggest factor in that opportunity is on Slide 13, our ability to leverage our industry-leading breeding program to upgrade our portfolio every year in every key corn growing region. There is real power in this significant steady engine across our biggest business. There is also a multiplier effect on Slide 14 as we use that same breeding engine to expand our opportunity as we target new high growth markets that drive volume. Today, it’s playing out in areas like Eastern Europe, one of our fastest growing corn regions this year despite the political unrest in the Ukraine. That’s the kind of opportunity that allows us to be on par this year with our record volume years even as acres have shrunk in key markets in North and South America. That core growth in seeds and traits is complemented by our ag productivity segment. Going forward, we continue to see ag productivity as an important strategic support for the seeds and traits growth. And while it’s likely there will be some variability in any year, we see this more in a support role than as a growth driver itself.
My final area of emphasis is on what I think will be one of the most significant incremental drivers and that’s our Climate Corporation platform on Slide 15. This year is a pivot point. We have some important proof points this year that increase our confidence in the ramp up to what we see as a 1 billion acre runway and a $20 billion market opportunity. As farms are increasingly digitized, precision ag can become an integrating point for information, seed, equipment and other inputs.
One of the most important areas of progress on Slide 16 has been in building out that platform. In the short time, since our Climate Corporation acquisition, this partner opportunity has been a highlight beginning with our early collaboration with WinField. We also have agreements with additional anchor partners, including Agrium’s Crop Production Services, GROWMARK, Wilbur Ellis and Helena as well as our first equipment partner, CNH Industrial. Including Monsanto, this is a base with more than $60 billion in total annual sales. And just as importantly, these are partners that touch virtually every corn and soybean acre in the U.S. in some form. That reach can help us take the next step in building an industry platform that makes precision agriculture a bigger tool for our farmer customers.
The next validation point is the interest in the suite of products in our Climate Corporation platform. The response has been far stronger than we anticipated. We wanted to see Climate Basic get a foothold as a free service to build exposure and interest and we believed if we could validate that on 20 million acres, it will be a strong year. As of the end of May, we had more than 40 million installed acres were total acres for all accounts and more than 30 million of those acres are active users using the service in the last 30 days. That means nearly 1 in 5 acres of U.S. corn and soybeans are enrolled giving us an account base that represents an important foundation for expansion and active usage that demonstrates the practical value on the farm.
We also entered the year planning for groundbreakers like experience on premium services like Climate PRO targeting hundreds of thousands of acres. The response has been equally good in this area. We now anticipate the premium offerings will be used on more than 1 million acres across the U.S. corn belt this year. We know this is just a start, but these milestones are a springboard that we expect to move us from an investment platform this year to a real earnings contributor in the next few years on to what we truly believe is a multi-billion dollar long-term opportunity.
Let me bring all these points together. We have passed a number of key milestones in the past 18 months. Those give us greater clarity in our growth outlook for the next five years. Those drivers come directly from the success we have had over the past decade reflecting a strong growing core and new platforms that draw on our powerful technology, Headstart. And that’s both a source of confidence and the point of focus as we target the compelling opportunity in front of us.
So, with that, let me hand it over to Pierre.
Pierre Courduroux - Chief Financial Officer
Thanks, Brett and good morning to everyone. As CFO, my priority is to have a clear view of what drives growth and how it translates into the financials. So, let me give you the highlights from today for financial lengths. Number one, our growth plan builds on the strong growth we have delivered in our business over the past few years continuing that momentum. And with our improved outlook today, we are on track to both deliver our bottom line guidance and to affirm seeds and traits as the biggest contributor of that full year growth.
Number two, setting a multi-year target underscores our confidence in our continued opportunity. I take a prudent approach to our guidance outlook. So, establishing a long-term metric is a reflection of our confidence in our core business, a compelling strategy and a clear view on the factors that drive growth. And number three, having served as several key milestones in our business, we are now well-positioned to better optimize our capital structure. Given the strength of our current balance sheet and our confidence in our growth prospects, we have decided to take advantage of the favorable debt market. By the end of FY ‘15, we intend to target the net debt to EBITDA ratio of 1.5. And one of the ways we will immediately put that structure to work is through a new 10 billion share buyback authorization, which includes our intent to use 6 billion in the near-term through an accelerated buyback program.
I will cover how we will use our capital structure in more detail, but before I do so, let me anchor on the business performance in the current fiscal year on Slide 17. With the visibility from Q3, we now expect to be at the upper end of our original ongoing EPS and free cash flow guidance ranges. With one quarter left, we have good clarity in delivering that updated range reinforcing our growth even in the challenging macro environment and with roughly $0.15 to $0.20 EPS impact from currency headwinds. Q3 came in somewhat better than we projected during our Q2 call with ongoing EPS of $1.62. That relative performance came across the P&L and includes some timing benefits from the core business, operating expenses and taxes.
If you look at the quarter on a year-over-year basis, as expected, the most direct factor in the comparison was the significant tax benefit that increased Q3 in 2013 and did not repeat this year. As we expected, the corn quarterly gross profit contribution was down versus last year primarily as a function of the reduced acre base both for the U.S. season as well as in Latin America, where Safrinha sales also carry into our third quarter. But overall, seeds and traits GP was up in the quarter as continued strong contribution in our soybean business largely offset the timing and acre effects in corn. The year-to-date performance keeps us on track to achieve strong gross profit growth across seeds and traits for the full year marking the biggest overall contributor to our fiscal ‘14 outlook. Through Q3, we have also seen incremental margin improvements in seeds and genomics and within the soybean and corn segments. And that extrapolates to our full year outlook, where we continue to project margin improvement across all three areas.
In soybeans, we will expect another increment of contribution coming from Q4 Intacta sales in Latin America and the second installment of the DuPont royalty reinforcing our full year expectation for a margin increase of 6 points to 8 points. In corn, we have seen very good margin growth in our U.S. business as we have seen the COGS benefit flow through together with the expected gains from our mix uplift. Those benefits have been offset some in Latin America, including the COGS effect in Argentina and the corn pricing dynamics in Brazil that Brett described. For the full year, we expect overall corn margin to still step up, but with those Latin American effects, it will likely come in somewhat lower than our original 3 point targets.
With our updated guidance, we still project a stronger fourth quarter, but given the timing benefit we see in Q3, we now expect to deliver a loss rather than breakeven EPS in Q4. Aside from some of that Q3 effect, we still see the same drivers that reduced the overall year-over-year loss, including the next increments of soybean growth, and uptick in corn as we anticipate less adjustments in U.S. returns and a more typical contribution from our vegetable business. And as a result, we expect to see the last incremental contribution that allows us to get to our full year ongoing EBITDA target of mid to high-teens growth.
If we move to the longer view, our fiscal year ‘14 performance becomes the foundation for how we see our strategy unfolding over the next five years on Slide 18. Working from the fiscal year ‘14 base, we are targeting at least doubling our ongoing EPS by 2019. And I am comfortable that there are multiple sources backing that target, reflecting a good line of sight on the core business, on the new platforms and on the benefit of our capital structure. And the reality is that all those factors should contribute. Likewise, we build our plan on baseline assumptions, so each factor holds the potential to be a bigger relative contributor depending on the different growth trajectories.
We have also left ourselves room to invest for growth, including CapEx to expand our base business as well as for M&A. The single biggest contributor is pure gross profit expansion reflecting the embedded opportunity in the core business. Logically, the biggest source of that growth comes from corn and soybean. These are also complemented by the expansion of the broader portfolio ranging from crops like vegetables, canola and cotton to continue technology development and licensing agreements. We see this opportunity translating to more than 4 billion in total incremental GP, which would mark our largest incremental seeds and traits GP growth in any five-year period in our history.
We also anticipate that the precision agriculture platform will become a meaningful contributor to earnings toward this five-year period. The contribution in the early years is expected to be relatively small, but as that business ramps up, we expect an accelerated contribution. As we look to build new platforms, we plan to align our investments and support them appropriately putting more resources behind these high growth areas and streamlining or redeploying some operating expenses from lower growth business areas.
The performance and operating expense discipline in our core business allows us to make some near-term investments in our new platforms to jump start those opportunities. In FY ‘14, we have invested a little more than $200 million of combined operating expense in precision ag and biologicals. We are planning to run that to an expected level of more than $300 million, $350 million in FY ‘15 as we make investments in the people and infrastructure that reflects our confidence in the earnings potential of these platforms. That is the conscious investment. And while we will step up our spending in FY ‘15, I continue to expect to generate overall leverage from GP to earnings once we passed this initial uptick.
One of the most important elements of our conversation today is our approach to capital allocation on Slide 19. A decision to return an additional $10 billion to shareowners is a result of careful consideration by our teams and the board over the last 18 months as we have achieved several business milestones that provide clarity on our planning and capital allocation. We are targeting a net debt to EBITDA ratio of 1.5 by the end of fiscal year ‘15. That’s obviously subject to the seasonality of our business, but fundamentally, we are comfortable with this leverage level. In the spot of our ongoing strategic planning, we will continue to review and recalibrate our capital allocation as appropriate with the goal of remaining both opportunistic and disciplined. At the level of 1.5 terms of debt, we expect to be able to better optimize our cost of capital while balancing a few key priorities.
On Slide 20, our first priority is to continue to invest in high-growth opportunities that support our strategy and drive growth. We have the financial flexibility to pursue both organic and external growth including investments in our business, in technology deals and M&A. We will be disciplined in our use of capital in this regard focusing on opportunities that meet our growth and return criteria. At the same time we are committed to returning capital to our owners and this capital structure affords us the flexibility to deliver further value to our owners with an accelerated buyback program and through dividends. Another important priority is to maintain our strong investment-grade credit ratings to provide access to attractive financing for our long-term needs as well as in season borrowings for our working capital needs.
One of the first priorities of our capital allocation will be on share buybacks. Our Board just approved a new two year $10 billion buyback program. We will use it in combination with approximately $1 billion that remains in our current program. And as an important first step we intend to use the combination in cash and new debt to target $6 billion for an accelerated share buyback which we anticipate beginning in the near-term and completing in about 6 to 12 months. We likewise continue our focus on the dividend as I view that as a priority element of our strategy as the source of direct income to our long-term owners.
With that let me bring this all together. Monsanto is at a unique point in our history. We have the confidence and visibility into our business to talk about delivering growth that effectively spans a decade. That visibility in turn allows us to take the next in our capital allocation. And from there I believe we can the unique combination of organic growth, new opportunities and our business structure to meaningfully grow our earnings, our cash generation and ultimately return to our shareowners.
Thanks and I will hand it back to Bryan for the Q&A.
Bryan Hurley - Investor Relations
Thanks Peter. With that, we will now open the line for questions. As we typically do, I would ask you to please hold your questions the one per person so that we can take as many from as many people as possible. So Kevin I think we are ready to open the line for questions at this point?
Earnings Call Part 2:
