Monsanto Company (MON)

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Monsanto Company (MON)

F2Q09 Earnings Call

April 2, 2009 9:30 am ET

Executives

Scarlett Foster – Vice President, Investor Relations

Terry Crews – Chief Financial Officer

Hugh Grant – Chairman and Chief Executive Officer

Analysts

Jeff Zekauskas - J.P. Morgan

P.J. Juvekar - Citigroup

Robert Koort - Goldman Sachs

Peter Butler - Glen Hill Investors

Kevin McCarthy - Banc of America Securities

Don Carson - UBS

Vincent Andrews - Morgan Stanley

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2009 results conference call. (Operator Instructions)

I would now like to turn the conference over to Scarlett Foster, Vice President, Investor Relations. Please go ahead, ma'am.

Scarlett Foster

Thank you, [Charlene], and good morning to everybody on the line. I'd like to welcome you to Monsanto's second quarter earnings conference call, and I'm joined this morning by Hugh Grant, our Chairman and CEO, and by Terry Crews, our CFO. Also with me today are Laura Meyer, [Annie Cruise] and [Rubin Maya], who are my colleagues in Investor Relations.

Before we begin, I'd like to remind you that we're webcasting this call and you can access it at Monsanto's website at Monsanto.com. The replay is also available at that address. For those of you who would like to go to our website, the slides for this call are posted on the Investor Information page.

I need to remind you that this call will include statements concerning future events and financial results. Because these statements are based on assumptions and factors that involve risks and uncertainty [break in audio] with the reconciliation to the GAAP measures in the slides and in the earnings press release.

Our press release highlights a reported in-process R&D charge this quarter for our recent sugar cane acquisition totaling $162 million pre-tax or $0.19 per share after tax. Please recall that Monsanto reported a gain of $210 million pre-tax or $0.23 per share after tax from the cash and stock settlement resulting from Solutia's emergence from bankruptcy in the second quarter of 2008. Both of these items were nonrecurring and are excluded from our conversation today about Monsanto's ongoing EPS.

I'd like to start with a brief review of our second quarter and first half results. Terry will cover our guidance and the outlook for the remainder of fiscal year 2009. Finally, Hugh will provide a strategic view to our 2012 commitments, with a focus on some milestones to watch for in fiscal year 2010. These include news about our launch plans for Roundup Ready 2 Yield and the trait penetration target for our Latin American corn seed businesses.

To start, let's take a closer look at the results that are shown on Slides 4 and 5. On the heels of a record first quarter, our ongoing EPS in the second quarter grew by 22% over last year's second quarter results of $2.16 per share. This was driven by a 14% lift in gross profit and an approximate 3 point increase to a 62% margin.

Breaking gross profit down by segment, we saw a 21% increase in Seeds and Traits, offset by a 6% drop from Ag Productivity, which included a 9% decline in Roundup.

Within Seeds and Traits, corn gross profit increased 20% in the quarter and gross margin improved by 1 percentage point. Most importantly, we held the value of our high-yielding corn seed and triple-stack traits in the U.S. Some 70% of the mix sold in our DEKALB and American Seed brands this year will be top tier triple-stack products.

These gains were partially offset by a $42 million pre-tax charge or $0.05 per share after tax for payments to growers in South Africa who were experiencing pollination and yield concerns with three white corn hybrids grown solely in that country. In a nutshell, these three hybrids appeared to produce less than optimal amounts of pollen. Fortunately, this hybrid issue was isolated to less than 4% of the roughly 6 million acres of corn planted there. We consider this charge part of our ongoing earnings as working with growers on production challenges is part and parcel of doing business in this industry.

Soybean seeds and traits likewise saw a lift in gross profit and gross margin in the quarter, with gross profit growing 39% and margins improving by nearly 2 percentage points. Growers have steadily been buying our higher-performing, higher-value soybean products in a year when we expect more acres of soybeans to surpass last year's record-setting crop. With that acreage growth comes a larger number of acres using the Roundup Ready trait and, hence, higher trait fees.

For both corn and soybeans, the margin improvement was somewhat dampened by greater cost of goods sold in the United States as we paid higher commodity prices last fall to our contract growers for our seed production.

Gross profit for our vegetable business was up 2%, with margins level with the prior year. These numbers include the acquisition of the De Ruiter protective culture business, the benefit of which was partially offset by $18 million of inventory step up in the first half of the year. The vegetable segment, which derives the majority of its income outside the United States, is also sensitive to currency fluctuations, as was the case this quarter.

As I just noted, the gain in Seeds and Traits more than offset a 9% decline in the gross profit from Roundup in the second quarter. As we had discussed previously, this is primarily a timing effect as U.S. customers pulled forward branded volume into the second quarter in 2008, ahead of a pre-announced price increase in mid-February last year. We are now on a more normal shipping pattern for the U.S. business in 2009. This means that the majority of our U.S.-branded Roundup volume will move in the third and fourth quarters. That said, we anticipate that as we optimize value for Roundup in the United States, we will give up branded volume for the full year in favor of maintaining our price leadership.

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