Monsanto Company (MON)

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Monsanto Company (MON)

F2Q10 Earnings Call

April 7, 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

Vincent Andrews - Morgan Stanley

Kevin McCarthy - BofA Merrill Lynch

Donald Carson - UBS

Jeffrey Zekauskas - J.P. Morgan

Jason Young – Morgan Stanley

David Begleiter - Deutsche Bank

Analyst for P. J. Juvekar - Citi

Analyst for Robert Koort - Goldman Sachs

Laurence Alexander – Jefferies & Co.

Charlie Rentschler – Morgan Joseph

Presentation

Operator

Welcome to the second 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, Operator. Good morning to everyone on the line. Welcome to Monsanto’s second quarter earnings conference call. I am joined this morning by Hugh Grant, our Chairman and CEO and Carl Casale, our CFO. Also joining me are Will McAndrew, [Manny Cruise] and [Ruben Maya], my colleagues in Investor Relations.

I would like to remind you this call is being webcast and can be accessed at Monsanto.com. The replay is also available at that address. We are 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 have provided you with a reconciliation to the GAAP measures in the slides and in the earnings press release which are both posted on our website.

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

So that we can save the bulk of the time for Carl and Hugh’s comments on today’s news about our 2010 guidance and our long-term growth plan I will give an abbreviated summary of our quarterly and first half results.

Our financial results for the quarter and for the first half of the fiscal year are summarized on slide four. As will be the case throughout the year, the reset of the Roundup business from 2009 to this fiscal year colors all other comparisons to the prior year. For the quarter, ongoing EPS was $1.70. Gross profit declined 17% to $2.1 billion while overall gross margins declined 8 percentage points to 54%. The largest driver for the year-over-year change was Roundup which also shows up particularly starkly on the gross profit line in the quarter.

Practically, Roundup gross profit in the quarter was breakeven. That is primarily because of the price reductions to reestablish and maintain historical price premiums as well as the fact the inventory that was first sent to the market had a pronounced COGS effect reflecting the higher production costs of last year. Additionally, our mix in the first half of the year is weighted to our lower margin supply volume so the higher COGS effect is magnified.

Globally, branded prices were in the $10-12 per gallon range except for the U.S. where pricing fell slightly below that band. Within seeds and trades there was an increase in gross profit of 2% over the last year. Corn gross profit grew slightly in the quarter but margins continued to be down relative to fiscal year 2009. On the positive side, results in Latin America were better than our expectations as favorable weather in Argentina ad a slightly better start to the second season in Brazil resulted in fewer corn acres lost than previously though. U.S. corn gross profit was essentially flat relative to last year.

Part of that reflects a timing shift as we expect to recognize a higher percentage of trade royalties from licensees in the second half of the fiscal year compared with last year. More pronounced was the fact that cost of goods dampened gross profit contribution within the corn portfolio. This reflects higher year-over-year costs associated with our U.S. corn hedge position as well as the incremental launch year production costs for SmartStax.

Soy bean gross profit was slightly ahead of last year and margins were 61% which is in line with last year. As previously discussed, the U.S. late harvest means a larger percentage of our total soy bean volume will occur in the second half of the year. That was partially offset by stronger results in Brazil because of the larger soy bean crop and a significant increase in the penetration of our first generation Roundup Ready trade.

Additionally in the quarter our pre-tax restructuring expense was $84 million. This included a $54 million charge to our U.S. corn cost of goods as we have made the decision to exit some product lines in our U.S. branded corn business and to streamline our products used across multiple brands and to enable the strategy for new hybrids for the 2011 season.

Year-to-date the Roundup reset likewise dominates the comparisons with our prior year performance. For these first six months gross profit for the company is down 30% or $1.2 billion. The majority of that decrease came from the Ag productivity segment while overall season trade gross profit was down slightly versus last year as the second quarter effects influence the year-to-date results. Our ongoing EPS for the first half of the year was $1.68, putting us more than halfway to the lower end of our $3.10 to $3.30 target for the year.

The effective tax rate for the first half of the year was 28%. As was the case in the first quarter benefits from several tax items were recognized in the second quarter which puts us in line for our projected tax rate of 29-30% for the full year. As we expected, the second quarter was a significant source of cash generation which begins to offset the use of cash we saw in the first quarter. Cumulatively free cash flow was a use of $89 million for the first half of fiscal year 2010 compared with a source of $1.1 billion for the first half of last year.

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