Monsanto Company (MON)

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Monsanto Company (MON)

F1Q10 Earnings Call

January 6, 2010 9:30 am ET

Executives

Bryan Hurley – Investor Relations

Hugh Grant – Chairman and Chief Executive Officer

Carl M. Casale – Chief Financial Officer

Dr. Robert T. Fraley, Ph.D. – Chief Technology Officer

Analysts

Kevin McCarthy - BofA Merrill Lynch

Jeffrey Zekauskas - J.P. Morgan

David Begleiter - Deutsche Bank

Mark Connelly - Sterne, Agee & Leach

Vincent Andrews - Morgan Stanley

Lucy Watson for Laurence Alexander - Jefferies & Co.

Christopher Shaw - Ticonderoga Securities

Donald Carson - UBS

P. J. Juvekar - Citi

Mark Gulley - Soleil - Gulley & Associates

Peter Butler - Glen Hill Investment Research

Robert Koort - Goldman Sachs

Presentation

Operator

Greetings and welcome to the first quarter 2010 Monsanto Company earnings conference call. (Operator Instructions)

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

Thank you, Rob, and best wishes to all of you for the New Year. Welcome to Monsanto’s first quarter earnings conference call. I’m joined this morning by Hugh Grant, Monsanto’s Chairman and CEO; by Carl Casale, our CFO; and by our Chief Technology Officer, Bob Fraley. Also joining me are Will McAndrew, [Manny Cruise] and [Ruben Maya], my colleagues in Investor Relations.

I’d like to remind you this call is being webcast and you can access it 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 the call are posted on the Investor Information page.

We’re providing you today with EPS measures on both a GAAP basis and on an ongoing business basis. In those cases where we refer to non-GAAP financial measures, we’ve provided you with a reconciliation to the GAAP measures in the slides and in the earnings press release.

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, 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 contained in our most recent 10-K and in today’s press release.

Today’s conference call features our sixth annual review of our R&D pipeline results. Carl will start things off with a review of the quarter, of guidance and of seed orders. Hugh will expand on the outlook for 2010 and Rob will take you through the pipeline update.

Because our time is short today with the R&D update, I will now turn the call over to Carl.

Carl M. Casale

Thanks, Bryan, and good morning and Happy New Year to everyone. Our first quarter is a small quarter and it’s a quarter that reflects very little of the business that will ultimately determine our fiscal year outcome, but it’s an important first step in delivering on the milestones and commitments we’ve outlined for the year.

But before I get into the detail of the results, let me give you my view of how this first small quarter fits into our full year outlook. First, as you’ve heard our team say many times before, our guidance is a commitment not an aspiration. Importantly at this first milestone, we closed out the quarter with EPS and free cash flow results ahead of our preliminary guidance. As show on Slide 4, if I combine the early data points from the first quarter with our evaluation of remaining variables for the year, I feel confident confirming our full year EPS and free cash flow targets today. That’s our commitment.

Second, fiscal 2010 marks the return to our normal earnings pattern as a result of the reset of the Roundup business. This can be seen on Slide 5, where all of our earnings this year will occur in the second and third quarters. The small first quarter magnifies anomalies and some key measures, particularly our corn margins. I’ll address these directly as they skew the quarter, but we would expect to see the total season genomics segment margins normalize for the full year.

Third, this quarter yields the first data points in the two areas I get the most questions on at this point; our confidence in our Roundup outlook for the year and what our order book tells us about the important U.S. seeds and trade season. These are still early indicators at this point, but both continue to track well and reinforce our confidence in our ability to deliver on our fiscal 2010 commitment.

Moving to Slide 6, let’s walk through the first quarter results. As expected, the year-over-year decrease in our first quarter results clearly reflects the resetting of the Roundup business. Against that, we delivered an ongoing EPS loss of $0.02 per share for the quarter, down from earnings of $0.98 per share in the prior year. On an absolute business, SG&A declined year-over-year, while R&D expenditures were slightly higher than the prior year as we managed more projects in the latter phases of the development cycle. While we anticipated certain discrete tax benefits that would be reflected in our full year tax rate, several of those occurred in the first quarter and represented a $0.03 benefit realized in this quarter. Given the first quarter loss, those discrete events add up to an effective tax rate of 56%, although the full year rate should still be in the 30% range.

We also ended the quarter slightly ahead of our free cash flow expectations. Free cash flow was the $1.6 billion use of cash in the quarter compared with $124 million source of cash this time last year. The reset of the Roundup business accounts for roughly 30% of this shift. A little more than half the cash decrease is a result of some prudent working capital management changes that altered the timing of cash flow in the quarter. This was primarily driven by a change to move up payment terms from our seed licensees which had traditionally been collected in the first quarter and our now collected in the fourth quarter. The remaining balance in fiscal 2009 came from the proceeds from POSILAC divestiture, which was $300 million.

In terms of cash deployment, we continue to use our cash to fund our current three year, $800 million share repurchase program. We spent a little over $60 million repurchasing shares in the first quarter, bringing us to about 40% of the way to completing our full authorization.

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