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Edited Transcript of MON earnings conference call or presentation 5-Apr-17 1:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Monsanto Co Earnings Call

ST. LOUIS Apr 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Monsanto Co earnings conference call or presentation Wednesday, April 5, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brett D. Begemann

Monsanto Company - President and COO

* Hugh Grant

Monsanto Company - Executive Chairman and CEO

* Laura Meyer

* Pierre C. Courduroux

Monsanto Company - CFO and SVP

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Conference Call Participants

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* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* Donald Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Frank J. Mitsch

Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst

* Jeffrey J. Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research

* Robert Andrew Koort

Goldman Sachs Group Inc., Research Division - MD

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Greetings, and welcome to the Monsanto Company Second Quarter Fiscal Year 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Laura Meyer, Investor Relations Lead for Monsanto. Thank you. You may begin.

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Laura Meyer, [2]

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Thank you, Christine, and good morning to everyone. I'm joined this morning by Hugh Grant, our Chairman and CEO; Brett Begemann, our President and Chief Operating Officer; and by Pierre Courduroux, our CFO.

Also joining me from the IR team is Ben Kampelman. Our second quarter call marks a critical time during our annual business cycle, and importantly, allows us to provide a meaningful outlook for the balance of the fiscal year. 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 and other measures on both a GAAP and ongoing business basis. Where we refer to non-GAAP financial measures, we reconciled to the nearest GAAP measure in the slides and in the press release, both of which are on our website.

This call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risk and uncertainty, the company's actual performance and results may differ materially from those expressed or implied in any forward-looking statements.

A description of the factors that may cause such a variance is included in our most recent 10-Q and in today's press release. The forward-looking statements are current only as of the date of this call, and the company disclaims any obligation to update them or the factors that may affect actual results.

First, let me share our second quarter results, as shown on Slide 4. As outlined in our reconciliations, we delivered as-reported earnings per share of $3.09 and ongoing earnings per share of $3.19 for the second quarter of fiscal year 2017, well above the prior year as-reported earnings per share of $2.41 and ongoing earnings per share of $2.42.

With that brief overview, I'll hand it to Hugh to provide the strategic outlook.

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [3]

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Thanks, Laura, and good morning to everybody on the line. The end of the second quarter allows us to gauge progress against our 2 priorities for the year: number one, to deliver our fiscal year 2017 operational plan and key milestones; and number two, to close the merger with Bayer. So let's start first with the deal as shown on Slide 6. Bayer has led the regulatory filing process with support from Monsanto, as appropriate, and as they indicated in their year-end earnings call, both parties are working towards closure at the end of this calendar year. They continue to expect the filing to be made with the EU Commission this calendar quarter, and progress has been made with the second request from the U.S. Department of Justice. Like you, we also see the other proposed combinations advancing, as this industry undergoes a necessary and a healthy transformation to serve farmers better around the world.

As the process moves forward, our emphasis at Monsanto is where it's always been, on bringing much needed innovation to growers. Robb and I have spent significant time sharing our perspectives with ag industry organizations, policymakers and grower groups on the benefits of this deal. Innovation is at the heart of the industrial logic for combining with Bayer, just as it was with the consolidation that we led in the industry 20 years ago.

Since then, we've seen scores of biotech, breeding and crop technology improvements, and our view is that the next 20 years will raise the level of agronomic performance even further. Very simply, this deal is about accelerating innovation, optimizing integrated solutions and expanding the offerings that will be available to farmers through broad licensing globally in the years to come. From delivering new choices even faster to expanding solutions in disease and insect control, our combination with Bayer is a real gateway to exciting possibilities in ag science, as shown on Slide 7. And it doesn't stop there. We think greater focus can be brought to historically underfunded crops, like wheat, as well as opportunities in geographies where agriculture could benefit from improvements in scale like parts of Asia, and certainly, in Africa. After outlining examples like these with growers, one thing is very clear, they want innovation and they fully recognize the role that it plays in bringing them solutions to run the profitable and sustainable operations necessary to meet the demand curves.

This overarching need to produce more hasn't changed. In fact, as seen on Slide 8, demand continues to strengthen. The trend line from WASDE forecasts projects that annual demand for corn and beans is expected to rise. Growth expectations for just the 2016, 2017 marketing year translates to demand for an incremental 1.7 billion bushels for corn and more than 600 million bushels for soybeans. To put that into context, if this incremental demand were met by new production acres in the U.S. alone, it would require more than 20 million new acres of corn and soybeans combined.

And as shown on Slide 9, it's Monsanto's proven innovation and unique platform advantages that position us well to meet these challenges and what makes us such an attractive complementary partner for Bayer. However, we're not sitting still, and we continue to invest in our future. We're building upon our industry-leading Climate FieldView platform and strong foundation of seed, trait and system solutions, particularly with our next-generation technologies in insect and weed control.

Shortly after we spoke back in January, we broke-ground our Luling, Louisiana glyphosate production site to make way for our first-ever dicamba production facility, expected to come online at the end of this decade. This plant, together with capacity being added by the industry, will be an integral part of delivering the top weed control system throughout the Americas. We're stoking this demand with the fastest trait ramp-ups in our company's history, with Roundup Ready 2 Xtend soybeans and Bollgard II XtendFlex Cotton. Longer term, we're building out our leading platforms with investment in R&D capabilities. We've nearly completed the initial phase of our planned $400 million Chesterfield R&D site expansion, and we expect that the ribbon cutting will be later this year.

In addition, technical pipeline projects are progressing well, including our blockbuster NemaStrike Technology with exceptional nematode control. The public comment period for the EPA approval process for this new technology recently closed with positive feedback, and we're now well on track for commercialization next year. Also, we reached another significant positive milestone in the reregistration of glyphosate in Europe with the European Chemicals Agency concluding that glyphosate is not a carcinogen. Once again, this aligns with more than 800 studies, spanning 4 decades that all confirm the safety of this critical farming tool. In fact, this same conclusion has been reached by the U.S. EPA, the European Food Safety Authority, and regulators in Japan and Canada and numerous other countries. So despite some headlines to the contrary, sound science from respected organizations continues to prevail.

And finally, on the business. We've done excellent first half, delivering $3.39 of ongoing earnings per share, as compared to $2.25 in the prior year. Our gross profit improved nearly 20% in the first half, due primarily to strong pricing and area expansion in corn in South America and the strong performance of our newest soybean seed and trait technologies. This growth in gross profit, coupled with the absence of the Argentina currency devaluation and the gain on the Latitude sale has propelled this strong start to the fiscal year. Given these results and our increased confidence in the outlook for the rest of the year, our guidance for fiscal year '17 now moves to the high end of the range for both as-reported and ongoing EPS.

So all in all, I'm very proud of our team and their focus on our business. We're making strides towards closure on the pending combination. Our record-breaking technology penetration continues to drive earnings growth and we're investing for the longer term in R&D. And we do all of this through our singular strategic lens to continue to bring value-added innovation to growers around the globe.

So with that overview, let me pass it to Brett to discuss the operational plans that support this outlook. Brett?

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Brett D. Begemann, Monsanto Company - President and COO [4]

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Thanks, Hugh, and good morning, everyone. Our focus on delivering the business has continued through the second quarter and places our company on a path to provide earnings growth through the turn of the decade. To help illustrate how, let's begin the operational outlook with corn, as shown on Slide 10. We continue to expect to grow our corn gross profit even as the commodity prices remain challenging in the mid- to high $3 range. This is driven by a global germplasm price-mix lift in local currency and genetic share gains despite expectations that the global planted acres could now decline slightly. Starting in the U.S. with an early spring, our Q2 deliveries were ahead of expectations, and provided some timing benefit. In addition, I'm pleased to share that we're sold out of our first year DEKALB Disease Shield hybrids, which also came with our newest microbial seed treatment, Acceleron B-300 SAT. In Brazil, double-digit price-mix lift in local currency continues in the second quarter, and we're seeing strong demand for VT Triple PRO traited hybrids. In Argentina, we now are estimating even greater growth in acres at more than 40%. And finally, Europe remains on track with strong grower demand driving volumes in the second quarter, though we do expect some decline in acres planted compared to last year.

Let's move to our soybean franchise on Slide 11 next. We're very excited about the story developing here. We're on pace to deliver greater than 25% growth in global soybean gross profit, and are seeing nice margin improvement year-over-year. Our ramp of Roundup Ready 2 Xtend soybeans in the United States is now moving fast, as shown on Slide 12. We have all the approvals in place for Xtendimax with VaporGrip Technology for the key soybean growing states we're seeking with the exception of Arkansas. We're also pleased to see that the recent EPA approvals of numerous tank mix partners, including glyphosate, providing industry-leading weed control and a convenient tool for growers. Seed supply is excellent, and we now expect 18 million acres of traded varieties to be planted from Mississippi to Minnesota. This demand-driven increase from our prior estimates matches our largest trait launch ever, and all together, at 18 million acres, would be the highest penetration we've ever achieved in the second year of a trait launch.

Moving to South America on Slide 13, performance of Intacta Roundup Ready 2 Pro continues to demonstrate its advantage over competing varieties, and we are in the early days of evaluating the first wave of our own yield trials. This adds to our confidence in the 45 million to 55 million acre range for the technology this year, as Intacta continues to set trait penetration records. In Argentina, our planning assumption is there is a continuation of the current royalty capture system for the upcoming season.

Our other crops are also seeing steady growth, starting with cotton on Slide 14. Bollgard II XtendFlex Cotton is now expected to exceed 4 million acres in the U.S., which will be a driver towards our target of delivering our third straight year of share gains. On top of that, we're starting to sell Bollgard 3 XtendFlex Cotton in the U.S. this year to further increase the spectrum and durability of insect control.

Moving to our Climate business on Slide 15. We're seeing major advancements in a number of areas. Digital ag tools are rapidly evolving, and the strategic differentiators for the Climate FieldView really set it apart. Collaborations and partnerships with others in this space as well as our pace of adoption and expansion have established our leadership role. Interest in joining our platform has been strong, and we're currently in discussions with more than 25 potential technology providers. We remain on track to deliver our fiscal year target of 25 million paid acres. And geographically, experience with the platform is growing in the U.S., Europe, Canada and Brazil, as shown on Slide 16. In fact, in Brazil, some of the largest growers in the country are using the technology on 750,000 acres. The feedback is good and we're off to a very promising start. Lastly, let's close with Ag Productivity. We're seeing first half price improvements for generic glyphosate acid translate to retail, which we expect to result in modest price improvements in the second half of the year. This anticipated price increase, plus volume growth, places glyphosate on a more positive trend line, although we do anticipate some higher cost with the increased volumes.

In addition, it was great to see the first shipments of Xtendimax with VaporGrip technology moving to retail, and we expect this to continue in the second half. In summary, I'll echo Hugh's comments. We delivered a great start to the year, and our operational plans set us up for a strong close. We have tremendous momentum with the record penetration we're seeing with our latest soybean and cotton technologies, and continue to anticipate genetic share gains across multiple crops and key geographies.

With that, I'll turn it over to Pierre for the financial translation of these operational plans. Pierre?

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Pierre C. Courduroux, Monsanto Company - CFO and SVP [5]

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Thanks, Brett, and good morning to everyone. Let's start with a review of the second quarter. In Q2, we delivered as-reported earnings of $3.09 per share and an ongoing earnings of $3.19 per share. These translated to growth of more than 28% in both as-reported and ongoing earnings per share, and was mostly driven by 3 things: more than $300 million of gross profit growth from our corn and soybean businesses; the absence of the approximate 180 million impact of the Argentine peso devaluation; and finally, the 83 million gain from the sale of the Latitude business recorded in other income this quarter. In corn, gross profit grew by 12% in the second quarter and came mainly from Brazil, Europe and the U.S. U.S. corn growth related primarily to improved cost of goods with the return of a more normalized production plan, while Europe and the U.S. combined had a volume-timing benefit of roughly $40 million, stemming from strong grower demand. In addition, they both delivered anticipated share gains, mitigated by expected planted acre declines. Finally, the single largest driver came from pricing in Brazil, where we continue to see strong double-digit germplasm price increases in local currency. In soybeans, the 19% growth in gross profit and 6 points of margin expansion came from reduced COGS and increased trait revenues from our Roundup Ready Xtend soybeans in the U.S., which were compounded by higher volumes from expected increased soybean acres and share gains. Cotton gross profit also grew nicely in the quarter, where we saw more than 50 million in growth in the U.S. This was due largely to a timing benefit from a change in our customer contracts, and to a lesser degree, from initial sales of our Bollgard II XtendFlex.

Moving to Ag Productivity. We saw our gross profit for the quarter grow by about 3% over the prior year. Regarding Roundup and other glyphosate-based herbicides, we continued to experience the pricing headwinds we expected. However, at the segment level, this was more than offset by incremental glyphosate volumes and the initial sales of our dicamba-based herbicides. Finally, as we expected, operating expenses increased in the quarter, mostly due to the return to growth of the business. These increases were primarily driven by increasing incentive accrual expense, higher commissions in South America and greater investment in the Climate FieldView platform. They were partially offset by the continued savings from our restructuring and transformation actions. We continue to expect these to generate $200 million of operating expense and COGS savings versus the prior year on our path to $500 million of savings by 2018 versus our 2015 baseline, as shown on Slide 17. For cash, for the first half of fiscal year '17, we delivered nearly $1 billion of free cash flow as compared to $900 million in the prior year. This improvement was driven by the considerable increase in our net income, offset by working capital increases from receivables and inventories and payments for restructuring actions accrued in the prior year. These results reflect our new definition of free cash flow, which is operating cash flows less CapEx. This new definition of free cash flow aligns to the more commonly used definition by publicly traded companies, and we've conformed our historical reporting and our guidance accordingly.

Let's move ahead to our full year outlook on Slide 18. With strong first half results, plus the outlook for the rest of the year, we now confidently expect to be at the high end of the as-reported earnings per share range of $3.95 to $4.44 and of the ongoing earnings per share range of $4.50 to $4.90. From a gross profit perspective, we continue to expect our Seeds and Genomics segment gross profit to increase mid-single digits as a percent year-over-year.

In corn, we expect some volume gains from global genetic share gains, particularly in the U.S., to contribute to this gross profit growth. However, we now anticipate acres planted to be down slightly on a global basis, with the upside in South America being more than offset by the expected declines in the northern hemisphere. Global germplasm price-mix lift in local currency is still expected to be flat to up low single digits in terms of percentages, with the strong increases in South America being muted by germplasm price-mix lift in the U.S. that is expected to be roughly flat. In soybeans, gross profit is expected to now grow by more than 25%, driven by new trait penetration and an anticipated cost of goods sold reduction. In cotton, with the strength of Bollgard II XtendFlex in the U.S. and the return of high-value acres in Australia, the gross profit is expected to grow by more than 35%. Meanwhile, other crops gross profit is expected to decline due to the absence of the onetime $210 million alfalfa technology license payment from Q3 of the prior year. Within Ag Productivity, considering deal dynamics and the variable Brett discussed, our gross profit guidance still remains within the range of $850 million to $950 million, albeit moving more towards the lower end. From a strategic deals perspective, with further advancement in our discussion, we are now expecting the benefit to be somewhat below the earlier estimate of $100 million from licensing and asset sales, and now shared between the EBIT of our 2 segments in the second half of the fiscal year. This shift is in the projected recording of the Ag Productivity deal benefit to other income. It is the primary reason we are pointing to the lower end of the range for gross profit for that segment. Overall, operating expense in 2017, excluding the pending Bayer transaction cost and restructuring expenses, are still expected to increase slightly. This is because inflation and the cost associated with the return to growth of the business are anticipated to more than offset our savings. Finally, our outlook also assumes that changes in currency rates will have a relatively neutral effect on net income for the full year, and we continue to expect the tax rate for the year to be in the range of 25% to 28%. If we look just at Q3, we expect as-reported earnings per share to be roughly flat with the prior year. This is due to the absence of last year's Argentine-related tax matters call-out of $0.50 per share, mostly offset by the expected decline in ongoing earnings per share from the absence of the alfalfa deal, which was roughly $0.34 of earnings last year, and the volume timing shift from Q3 to Q2 in the European and U.S. corn businesses.

For the full year, we now anticipate these earnings to translate to the high end of our range of $1.2 billion to $1.6 billion of free cash flows, resulting from expecting operating cash flows at the high end of a range of $2.4 billion to $2.8 billion and CapEx of $1.2 billion.

In closing, at the midpoint of our year, we look back on a strong first half, driven by outstanding returns on innovation and financial discipline. As we look forward, we're increasingly confident in the outlook for our business and our continued progress towards closure of the pending combination with Bayer.

With that, I will now pass it to Laura for the Q&A.

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Laura Meyer, [6]

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Thanks, Pierre. With that, we'd now like to open the call for 20 minutes of questions. (Operator Instructions) Christine, we're ready to take questions from the line.

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Questions and Answers

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Operator [1]

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

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [2]

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Just a question on the corn segment. It looks, as far as I can tell, that your cost performance came in a lot better than, certainly, what we expected, and I think what the street expected and just looking at the gross profit margin of almost 67% is the highest one we've seen. So I get that there was a lot of pricing in the South American market, but it was cost that you called out in the press release. So did the cost come in better than expected or -- and were these results and margins better than you expected?

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [3]

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We're delighted with corn and soy performance, but Pierre, maybe just a little bit of color, and Brett, a few words on pricing?

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Pierre C. Courduroux, Monsanto Company - CFO and SVP [4]

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I mean, specifically, Vincent, regarding the point on corn gross margin, I think you pointed to the key elements of why we ended up in a really good place from a margin perspective. So pricing in South America, specifically pricing in Brazil, as we mentioned in our prepared remarks, has been extremely strong, and we've seen a nice recovery and some growth in pricing in Brazil. So this has been something we've been observing in the first quarter, but also continuing into the safrinha market into the second quarter, so that was really a very strong performance in Brazil. And regarding costs, I mean, you remember we've always talked about having a penalty last year related to our cost of goods and reduced production plans. This year, we are going back to normal production plans. And as expected, we are seeing an improvement in our cost of goods position. So from a pure margin perspective, these would be the 2 critical drivers. And we've also seen really nice performance in terms of volumes in the U.S., in Europe, part of that being related to timing. I mean, we've got a really nice mild weather during the winter, but also expected share gains. And obviously, we'll see that before the end of the year, but a very strong performance in corn in this quarter, definitely.

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [5]

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That was good. I think you've covered them.

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Operator [6]

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Our next question comes from the line of Chris Parkinson with Crédit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [7]

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Just very quickly on Intacta, you've mentioned you've licensed out the germplasm providers to just over 90% share in LatAm. But can you just comment on the rough number of varieties you're -- on the context of the total portfolio versus last year and for the upcoming season? In other words, do you still need to ramp with certain licensees in terms of the number of varieties over the next 2 seasons to reach your long-term goals or is this not really even a consideration anymore?

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [8]

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Chris, thanks for the question. I just got back from São Paulo at the weekend. And Brett, it's my impression they've colored in the map, really. They're in good shape.

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Brett D. Begemann, Monsanto Company - President and COO [9]

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Yes. We're in great position with Intacta in South America. We're well covered with varieties from the South to the North, and the seed companies will all continue to move Intacta into their latest and greatest varieties as they continue breeding, but that's just normal process. We have very good coverage with varieties now across the country.

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [10]

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And yields looking good.

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Brett D. Begemann, Monsanto Company - President and COO [11]

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Yield is just starting to come in, and we see our own stuff first before we do the rest, and we're positively inclined with what we're seeing with our own yield results. And from the little bit that we're hearing from farmers and the little bit of harvest that's going on, it's positive there as well.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [12]

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We'll see if we come in above $110 million.

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [13]

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We'll see.

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Operator [14]

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Our next question comes from the line of Don Carson with Susquehanna.

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Donald Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [15]

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Hugh, question on the impact of acreage shifts on your earnings. I know in the past that shift from corn to soy was negative. But this year, if we look at the top 3 crops, corn, soy, cotton acreage is actually up 4 million in total. With the launch of Xtend, are you now indifferent between corn and soy acreage in the U.S. and then just how do you see that going forward as you ramp Xtend up?

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [16]

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Yes, Don, thanks for the question. I'll let Pierre do a little bit on the background, but this could be a unique year. I mean, we're still a ways from spring, but we -- as Pierre said, we never really had much a winter. It's a very open spring. It's turned a bit wet now, but it's a very open spring. And we could be looking at a year where we get 90 million acres of corn and 90 million acres of soybeans. So the good news is we've got that hedged between the 2, and the extraordinary news is we are launching Xtend this year. So if you think about Brett's numbers, 18 million-acre launch in a 90 million-acre market, we could be on 20% with crop in the first year, which is extraordinary. And then the economics, Pierre, just on the trade-off between the 2 90s?

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Pierre C. Courduroux, Monsanto Company - CFO and SVP [17]

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So Don, regarding the economics, they have slightly changed, but the dynamics are still the same. We are still looking at a differential in between corn and soybeans in favor of corn for about $0.02, roughly. And regarding cotton and corn, they are now about equal. So the differences in between those different crops has reduced, which is actually more comfortable for us, but definitely corn is still the most profitable crop for us.

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Donald Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [18]

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And then how do you see that Xtend ramp next year, Hugh, into years 2 and 3?

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [19]

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It will be bigger. I mean, we are -- it's Catch-22. We spent so long waiting on this coming through. It has elements of the Intacta launch around it, where to Chris's previous question, we kept expanding the varieties. We kept ramping the opportunity. And as we look at next year it's 50 million, 55 million in 2019, so it's going to be a significantly faster growth rate than we've seen in a lot of things because of the rehearsal time that we had. So I would -- if you're looking at your models, 55 million in '19 is achievable.

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Operator [20]

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Our next question comes from the line of David Begleiter with Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [21]

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Hugh, you mentioned some genetic share gains in corn and beans this year. Just on corn in the U.S, how much share gain do you think you can achieve? And from whom are you realizing the share gains from?

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [22]

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So early days, but Brett, you want to take a swing at the genetic gains?

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Brett D. Begemann, Monsanto Company - President and COO [23]

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You guys know me well because you hear from me every spring at this time that we know what the farmers' expectations are now from the WASDE report, and that's close to 90 million acres of corn. And I would tell you that the biggest driver between now and June on what they actually plant is mother nature and the weather. And a month ago, it looked like they were all going to start planting in the middle of March, and then it started raining and now there hasn't been much planted. So we've got to see what actually gets planted, what the returns in replants look like. But what I will tell you is that I feel good enough with the deliveries that we've already made, the remaining orders that we have and the expectation that acres will fall plus or minus 1 million, around 90 million, that we're going to be in a strong position to grow share. And when I look at where the share is going to come from, it's too early to call because I don't know what everybody else is doing, but I know where our volumes are and kind of where the acres are, so I feel really good about that. I think you're going to see it across the whole industry. I don't think there's any earth-shattering moves that are occurring out there. That would be my anticipation. I think it will be across the board.

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Operator [24]

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Your next question comes from the line of Robert Koort with Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [25]

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I'm hoping to explore a little bit the price-mix challenges in corn, and wondering if you could speak to maybe how the new hybrids are doing or if that share of your portfolio has changed at all. And are we seeing just lesser price increases on the top end, greater price increases on the aging end? Could you give us some characterization of what's going on within your bands of hybrid years?

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [26]

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Yes, well, the first piece because we always tend to go at the U.S., but the extraordinary story in this quarter has been the Latin American contribution, particularly Brazil, particularly in corn and particularly in pricing in corn. But Brett, a little bit on how the curve looks in the U.S. relative to other books and how that's evolved?

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Brett D. Begemann, Monsanto Company - President and COO [27]

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Yes. I think, as all of you know, the environment for our customers continues to be very difficult with corn prices still, call it, plus-minus $3.50, hanging in there somewhere. And that's not a robust pricing scenario for our farmer customers, so it creates a challenging environment. So 2 things that, that impacts. Number one, as you increase yield, which we do with our new hybrids and introduce those into the marketplace, the value of that incremental yield is based upon the price of the commodity. So that has an effect, Bob, on how much you actually go up based on that yield gain that's occurring. And then it also plays into the farmers' expectation around how they set their portfolio. Here's what has not changed, and this has been consistent for many, many years. Farmers do not back away from buying the latest and greatest because they drive yield and productivity. That is their only friend, whether it's a good commodity environment or a bad commodity environment, that's their only friend, is drive yield and dilute the fixed costs that they're getting across their business. And when they start using tools, like Climate, and start managing their other inputs more effectively and efficiently and they can still get those yield increases, they can drive their cost per unit of production down. So that's the focus and that's why you look at this year, we completely sold out of our Disease Shield hybrid with the new B-300 SAT, which is -- that is our top of the line. It doesn't get any better than that, and those sold out. So farmer demand for high end is still there. They look at adjusting through the rest of the portfolio, and it's been hard to get those price increases with commodity price, and that's how it plays out and puts us where we're at.

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Operator [28]

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Our next question comes from the line of Joel Jackson with Bank of Montréal.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [29]

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I just want to get a sense of how competitive the market has been for corn in the U.S. this spring. We had heard that it's gotten more competitive, a little more discounted in the last few months. Maybe you could compare to how the season played out a year ago?

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [30]

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Yes. A different season than last year. To Brett's point on when you see commodity prices where they are, it's tough, growers in a tough environment. So competition's alive and well, but more hotspots than national, Brett?

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Brett D. Begemann, Monsanto Company - President and COO [31]

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Yes. We went into the year with our eyes wide open, but I would tell you, it's been as much as I can frame it a normal year. There's always pockets. That happens every year. And when you have a smaller acre base, everybody is fighting hard for their position. There's a lot of good products out there competing, and there's new products being introduced and so you're going to see some, but I'd can call it as close to normal as you could frame it. And that's kind of what we were hoping for and expecting, and that's kind of where it's landed.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research [32]

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Where were the hottest pockets of competition?

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Brett D. Begemann, Monsanto Company - President and COO [33]

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Yes. It's not even where you could frame it by state because it really is within pockets within states, where there's our portfolio versus everybody else's portfolio and what your mix looks like in a given multicounty area and that type of thing. So you find places where you have extra strength, if you will, or weakness and where everybody in the industry is very good at understanding where other companies have strengths and weaknesses and you go after those opportunities. And that creates a little bit of the paint [ rev ] when that occurs with -- in some of those pockets, but they're not even big enough to call them states.

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Operator [34]

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Our next question comes from the line of Jeff Zekauskas with JPMorgan.

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Jeffrey J. Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [35]

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Your corn revenues were up 8%. Can you give us a rough idea of how much of that was volume, price and currency? And in your Ag Productivity area, you sound more optimistic about glyphosate pricing, but you're now on the lower end of your gross profit expectations. Is that because there's licensing revenue that's missing that you expected? Or has there been a reallocation to the other income area, so that, really, you would be at the higher end of your expectation if there were no reallocation?

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [36]

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Right. Now that -- 2 good questions.

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Pierre C. Courduroux, Monsanto Company - CFO and SVP [37]

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So if you look at the first half in corn, what we've seen is -- I mean, the -- I would qualify the growth really, into 3 buckets. The first one would be that the volume performance in South America and the price performance in South America, and mainly, in Brazil, and this would represent about half of the growth. Then if you look at the northern hemisphere, you look into the U.S., you look into Northern Europe, the rest of the growth is coming from those places, and it's going to be mostly volume and COGS and roughly 50-50 in between volume and COGS. So at a really high level, that's how I would qualify the growth you're seeing in our first half corn results.

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Jeffrey J. Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [38]

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And in Ag Productivity?

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Pierre C. Courduroux, Monsanto Company - CFO and SVP [39]

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So regarding Ag Productivity in the second part of the year, I think you've pointed to a couple of the elements that are driving our thinking. So first of all, we are really happy to see the price of Roundup continuing to slowly go up, which is favorable, and which was one of our planning assumptions getting into the year. So this one will be a positive in the second half. What we're seeing in the second half is -- I mean, because of the sale of our Latitude business, we are not going to have the revenues from that business that we usually enjoy in the fourth quarter. And then from a cost of goods perspective, we've got a couple of increases in cost of goods in our glyphosate business and also a number of project costs on the manufacturing side that are going to impact our second half results. So these are the key drivers of our guidance into the second half of the year. Regarding the slight adjustment to our guidance in the second half, it's mostly that some of the deals we are contemplating based on the work we've been doing is also going to be recorded in other income rather than gross profit. But overall, I mean, the nice thing we are seeing in this segment is that our glyphosate business now is on the right trend.

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Operator [40]

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Our final question will come from the line of Frank Mitsch with Wells Fargo.

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Frank J. Mitsch, Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst [41]

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I had a question on the expected closing for the transaction. Hugh, obviously, you've seen extended delays in other M&A, and you're still holding till the end of the 2017 target. How confident are you or what gives you the confidence there? And I guess, you also have a really good idea between you and Bayer as to where the issues would be. I'm curious if there've been exploratory talks with other companies on the expected regulatory remedies that may be required.

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Hugh Grant, Monsanto Company - Executive Chairman and CEO [42]

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Yes, Frank. Thanks for the questions. From the beginning of this, our position has been that all these deals should be done and that the industry really not only would benefit, but the industry really needed this consolidation. So as you think about despite the terrible commodity prices at the moment, the grower, to Brett's point, is desperately hungry for innovation, and a big piece of that innovation, I think, is going to come through this work. Each of these deals is unique, but we are heartened to see the deals ahead of us making progress because I think it underscores the fact that the regulatory process works. And then to your point on closure by year-end and confidence, we've learned over the years, it's never good to speculate on government agencies, but I would tell you the unique thing about our deal, I guess everybody thinks that their deal is unique, but the unique thing about this deal is the very limited amount of overlap. So as this call this morning has underscored, we're really strong in the area of seeds and biotech. Bayer is the premier company in the broad front of crop protection. And I think that -- I won't speak for regulatory agencies, but the remedy lies in the elimination of the overlap around the world. So we are working -- Bayer is taking the lead. We are supporting them, but we are working diligently towards a year-end close. And Robb and I have been bundling plane hours, going and talking to ag constituencies around the world, and those have gone well. The feedback there has been good because there's such a focus on the need for not just more innovation but faster innovation. The time lines, when you think about how long we waited on Xtend, 7 years from submission to approval, there's a need to kickstart faster innovation in this industry, and I'm hopeful that this conclusion -- or the conclusion of this deal will see a phase shift on timing as well. So that's how I'm looking at it. And obviously, as owners and people interested in the company, we'll keep you up to speed as we get more to talk about.

So let me respect your time and I thank you for joining us today, and thanks to Laura and her team for continuing to bring, albeit streamlined communication, but keeping the facts in front of you during this period. So as we close out today, I'd say it's clear that the year ahead for us will be significant, and we here at Monsanto are clearly focused on our 2 key deliverables. To that end, our plan to return to EPS growth in '17 is tracking nicely. And to the previous comments from Frank, we continue to work towards closing the agreement to combine with Bayer by the end of this calendar year. I'm very proud of our teams here at Monsanto. They've maintained their focus on the business, and as always, they've maintained focus on our grower customers during a tough time and have turned in really good results. So thanks again to you for joining us on the call this morning, and we look forward to speaking with you again in June at our Q3 earnings. Thanks very much.

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Operator [43]

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Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.