Monsanto’s net sales decreased by 8.5% to $4,189 million in the third quarter of FY 2016 ended May 31st, with gross profit down by 13% to $2,380 million. For the first nine months of fiscal year 2016, net sales were approximately $10.9 billion and gross profit was approximately $5.9 billion.
“Our long-term optimism within agriculture and our business remains,” said Hugh Grant, chairman and chief executive officer. “Our industry is running at a low point in the overall agriculture cycle and we’ve experienced an unforeseen level of challenges affecting our business in fiscal year 2016. Today, however, we anticipate positive resolution on the horizon for several of these challenges, coupled with early signs of recovery in agriculture. With the strategic changes we’ve made to our business, we’re well positioned to further strengthen our leadership role in the agricultural space through financial discipline and steadfast commitment to serving growers with new innovation.”
“While there is no formal update on the Bayer proposal, I have been personally in discussions with Bayer’s management over the last several weeks, along with others regarding alternative strategic options,” added Grant. “We continue to recognize the potential value these types of combinations can create as they accelerate innovation and increase choice for farmers across a broader set of crops, geographies and production practices, while improving the sustainability of agriculture around the world. That is why we remain open and will continue to actively engage in constructive dialogue to pursue value enhancing strategic options.”
Seeds & Traits Business
Net sales for the Seeds and Genomics segment in the first nine months of fiscal 2016 were $8.4 billion, with segment sales for the third quarter reaching $3.2 billion.
Through continued new corn hybrid portfolio introductions across key corn growing regions, as well several late stage technologies that have licensing and launch opportunities in the near term, Monsanto’s largest crop platform remains strong. This is illustrated by the expectation that the company held or grew its global genetic share in fiscal year 2016.
The company also expects to grow its corn genetic share in the United States in fiscal year 2016, with this year marking the second-highest year of U.S. corn sales volume in the history of the company. In Brazil, where Monsanto grew share in the first season of the year, the company expects acres planted to corn will increase in the mid-single digits for the upcoming season and that the ramp up of VT Triple PRO® corn will continue as farmers trade up to better insect control. In Argentina, the company’s corn share remains above 50 percent in a region where acres declined significantly versus the prior year. With an expected lift in commodity prices and reduction in export taxes, the outlook is that corn acres in Argentina could increase more than 20 percent for the upcoming season. Finally, in Europe, with an estimated eight points of share gain in the past eight years, the company looks forward to continuing to be the fastest-growing corn seed brand in the region.
In soybeans, the company plans to build off the 35 million acres of Intacta RR2 PRO™ soybeans that were planted across South America in fiscal year 2016 as it targets to grow that number to 45 million to 55 million acres in fiscal year 2017 on the way to its full 100 million acre opportunity. Demand for Roundup Ready 2 Xtend® soybeans also remains strong as the company continues to await the E.U. stack trait approval. Despite repeated delays, Monsanto remains optimistic that it will receive the stack approval from the E.U. shortly, placing the company in a strong position to supply roughly 15 million acres when the selling season arrives in the fall.
Now in its second year of launch, the company expects Bollgard II® XtendFlex® cotton to have reached approximately three million acres in the United States this year, representing an approximate four-fold increase over last fiscal year. The company expects these new varieties will drive continued branded share gains on the order of three or more points this fiscal year, which builds on the three point share gain achieved in fiscal year 2015.
Monsanto also continues to make strong progress across its Climate FieldView™ platform, reaching more than 13 million paid acres in fiscal year 2016 and a target of 25 million paid acres in fiscal year 2017. The step-up in paid acres this year builds from the total platform footprint for the technology that is above its target at more than 92 million acres, with more than 75 percent of those platform acres with growers who are monthly active users of Climate’s digital tools. In addition to strong product adoption as an endorsement of the platform, recent farmer survey results indicate that growers now identify Climate FieldView™ as the number one digital agriculture brand in the industry. Global expansion of Climate FieldView™ is on track, with a pre-launch planned in Brazil this fall and a launch in Eastern Canada planned in the spring of 2017.
Net sales for the Agricultural Productivity segment in the first nine months of fiscal 2016 were $2.5 billion, with segment sales for the third quarter reaching $982 million. Year-over-year, gross profit margins declined due to lower Roundup pricing and the absence of the $274 million licensing deal with Scotts.
For the full year, the company continues to expect to sell a higher ratio of branded volume, as compared to the prior fiscal year. However, the company continues to expect full-year volumes to be below its roughly 300 million gallons of capacity.
The company has resolved, or is seeing signs of positive resolution, for several of the headwinds it has been tracking. This includes the expected 18-month extension of the existing authorization for glyphosate use by the E.U. Commission and the anticipated near-term receipt of the E.U. approval for the Roundup Ready 2 Xtend® stacked trait, as well as Argentina’s recently announced interim policy that supports mandatory testing as well as its intention to seek a long-term solution that will support investment. Despite this, the fiscal year 2016 full-year as-reported EPS guidance range has been adjusted to reflect the Argentina-related tax matters and a favorable change in the expected amount and timing of restructuring expense, and is now expected to be at the low end of the $3.36 to $4.14 adjusted range. The company also expects to be at the low end of its ongoing EPS full-year guidance range of $4.40 to $5.10. Monsanto’s as-reported and ongoing guidance incorporates the anticipated continuation of several global and industry headwinds, including approximately $0.85 expected related to currency.
Net cash provided by operating activities is expected to be $2.2 billion to $2.6 billion, and net cash required by investing activities to be approximately $900 million to $1.1 billion for fiscal year 2016. Consistent with its updated earnings projections and based on the possible slight delay in the closing timing on the sale of the precision ag equipment business to John Deere, the company has adjusted its full-year free cash flow projections for fiscal year 2016 to $1.3 billion to $1.5 billion.
With the revised earnings outlook, the company expects gross profit growth from its core Seeds and Genomics segment to be down just under five percent for the full fiscal year. Exclusive of estimated currency headwinds of roughly $350 million, Seeds and Genomics segment gross profit is estimated to be flat to up slightly. This is driven primarily by the recent alfalfa licensing deal with Forage Genetics, increased Intacta RR2 PRO™ soybean adoption and global corn volume expansion. Agricultural Productivity segment gross profit is trending to the lower end of the $900 million to $1.1 billion range for fiscal year 2016.
The company remains on-track to deliver $165 million to $210 million in savings from its restructuring actions in fiscal year 2016, primarily benefiting operating expenses. These savings, combined with spending discipline and currency benefits, contribute to the company's expectation that operating spend will be down slightly for the full fiscal year, before estimated restructuring charges and environmental and litigation matters. This expectation also is inclusive of increased investment in new platforms. Other expense, net is expected to be relatively flat year-over-year as the nearly $180 million devaluation of the Argentine peso is being offset by sales of non-core assets of approximately $170 million.
Looking ahead to fiscal year 2017, assuming relatively stable currencies, the company expects a return to growth in EPS. Monsanto’s core business is expected to continue to drive the near-term growth opportunity, including the expected continued rapid adoption of the company’s latest soybean technologies, the durability of its global corn platform, continued financial discipline and an improved cost of goods outlook for corn and soybeans. From a year-over-year perspective, growth in fiscal year 2017 is expected to be partially offset by declines in glyphosate pricing, particularly in the first half of fiscal year 2017, by a lower level of non-core licensing deals, as well as by a slight increase in spend with inflation and expected increases in commissions and incentives. The company also expects a more normalized effective tax rate for the coming fiscal year.
Beyond fiscal year 2017, the opportunity is expected to accelerate with streamlined operations and portfolio advantages anticipated to drive Monsanto’s multilayered growth into 2021. This includes an expected target of mid-teens compounded annual EPS growth rate from the end of fiscal year 2017 to fiscal year 2021.