South American soy technology demand, glyphosate pricing contribute to solid Q1 Earnings for Monsanto

As progress continues for the merger with Bayer, Monsanto Company announced strong results for the first quarter of its fiscal year 2018, growing as-reported earnings per share (EPS) to $0.38. Early indicators from the first three months, such as volume and pricing growth for INTACTA RR2 PRO^™ soybeans in South America, improved pricing in glyphosate and more than $85 million in gains from asset sales, signal that the company is well positioned to deliver on its business goals.

Likewise, in its annual Research & Development (R&D) pipeline showcase, Monsanto highlighted how new technologies will help growers combat threats in the field and optimize opportunities with less land, energy and water. This marks the fifth consecutive year of more than 20 research projects advancing. The company released information on the R&D showcase in a separate announcement this morning.

“Even with the Bayer combination on the horizon, our teams have maintained their focus on the business and our customers, and delivered solid first-quarter results,” said Hugh Grant, chairman and chief executive officer for Monsanto. “As we look to the balance of the year, we continue to expect strong adoption of our newest technologies and improved pricing for glyphosate to be tempered by challenging global corn and soybean prices, even as demand for both continues to grow.”

“This year, we advanced a record number of projects in our research and development pipeline, spanning all platforms and allowing us to continue to fuel innovation for the industry through our broad licensing approach,” added Dr. Robb Fraley, Monsanto's executive vice president and chief technology officer. “The combination with Bayer will allow our two companies to accelerate the pace of innovation through our shared vision. We’re excited and energized about the new areas of scientific advancement we expect to unlock by combining with Bayer, to allow us to bring more products to farmers faster."

Results of Operations

For the fiscal year 2018 first quarter, net sales were nearly flat compared to the prior year’s first quarter at $2.7 billion. Gross profit for the quarter grew slightly, to $1.3 billion. More than $85 million in gains from asset sales were recorded in the first quarter, the most significant being the sale of Precision Planting to AGCO.

Selling, general and administrative costs were $664 million, and research and development expenses were $382 million for the first quarter of fiscal year 2018. Total selling, general and administrative costs and research and development expenses increased, mostly due to higher commissions, point-of-delivery costs and bad debt expense associated with the growth in South America, as well as from inflationary increases and increased spend on R&D.

The company’s fiscal year 2018 first quarter EPS on an as-reported basis was $0.38, as compared to $0.07 in the prior year. EPS on an ongoing basis was $0.41, well above the prior year’s $0.21, driven by the strong start to the business in South America..

Fiscal Year 2018 Outlook

The company expects growth in its pretax income for fiscal year 2018, but did not provide specific financial guidance in light of the pending combination with Bayer. The expected growth drivers for Monsanto’s business are continued improvements in pricing for glyphosate, plus the adoption of new technologies in Seeds and Genomics such as INTACTA RR2 PRO^™ soybeans, Roundup Ready 2 Xtend^® soybeans, Bollgard^® II XtendFlex^® cotton, and new corn hybrids around the world. Gains from recent asset sales are also contributing to growth. The company will remain disciplined as it monitors the evolution of U.S. corn and soybean plantings through the spring.

For Agricultural Productivity, volumes of XtendiMax^® Herbicide with VaporGrip^® Technology are expected to expand as acreage grows. The company continues to invest in the construction of its dicamba manufacturing plant in Luling, La., slated for completion in 2020.

As communicated previously, the company expects to complete its restructuring and cost savings initiative that began in fiscal year 2015, with the expectation that selling, general and administrative costs and research and development expenses in fiscal year 2018 will be down slightly year over year. Once the initiative is completed, the company expects to realize annual savings of $500 million in fiscal year 2018 as compared to its fiscal year 2015 baseline.

The company noted that benefits related to strategic asset sales and licensing contributions are expected to be about 30 percent below the roughly $350 million pre-tax average annual contribution for the last three years.

In regards to the recent passage of the U.S. tax reform legislation, the company expects it to have a positive impact on the company’s effective tax rate, beginning in fiscal year 2019. For the current fiscal year, the company is still completing a full assessment; early estimates indicate that the effective tax rate should not exceed 30 percent, and has the potential to be materially lower.

(A)   Fiscal first quarter 2018 and 2017 seeds and genomics gross profit includes a pretax restructuring charge totaling $10 million and $1 million, respectively, related to certain asset impairment charges, primarily in the soy and corn business, respectively, which is included in cost of goods sold.

(A)   EBIT is defined as earnings before interest and taxes. Interest and taxes are recorded on a total company basis. We do not record these items at the segment level.

The Seeds and Genomics segment consists of the global seeds and related traits business, biotechnology platforms and digital agriculture.

Sales for Monsanto's Seeds and Genomics segment were $1.8 billion for the first quarter of fiscal year 2018, down slightly compared to the same period last year. Gross profit in the segment was $1.1 billion for the quarter, similar to the same period last year.

In soybeans, global demand for the newest technologies fueled first quarter sales and a 30 percent jump in global soybean gross profit year over year, along with margin improvement. In South America, growers continue to adopt INTACTA RR2 PRO^™ soybeans at an unprecedented pace, and the company expects to reach 60 million acres in fiscal year 2018. In addition, the company delivered price improvement in local currency in the first quarter, helping to recover some value lost to currency in recent years. Moving to Roundup Ready 2 Xtend^® soybeans, the weed control, performance and adoption of this technology has been outstanding. Monsanto’s 2017 system yield results from its trials showed that Roundup Ready 2 Xtend^® soybeans demonstrate a 5.7 bushels per acre average yield advantage compared to the Liberty Link system. This past season, 97 percent of surveyed soybean growers who used XtendiMax^®Herbicide with VaporGrip^® Technology reported weed control satisfaction. The company continues to expect 40 million acres of Roundup Ready 2 Xtend^® soybeans to be planted in fiscal year 2018.

Monsanto's corn business saw gross profit decline 22 percent in the first quarter, mostly due to lower volumes. A significant portion of this was in the U.S. and is expected to be recovered later in the year. Some was related to lower corn acres in Brazil, as expected. However, the company expects the launch of new premium-priced hybrids globally to drive genetic share gains, and to expand the footprint of its newest offerings in the U.S., particularly DEKALB^® DiseaseShield™ hybrids and Trecepta™ corn, which is launching in select areas.

In cotton, gross profit for the first quarter was essentially flat compared to the same period last year. Despite lower planted acres in Australia, almost the entire market in the country transitioned to adopt Bollgard^® 3 cotton in just two seasons. In the U. S., the company expects more than 6 million acres of Bollgard^® II XtendFlex^® cotton, coupled with continued brand share gains.

Beyond seed technologies, the Climate FieldView^™ platform for digital agriculture is expanding globally as planned. The company recently announced a pre-launch in Germany, France and Ukraine, adding to the existing business in Brazil, Canada and the U.S. At the same time, four more partners were added to the platform, a digital imaging partner in the U.S. and three new partners in Brazil. The addition of these partners supports The Climate Corporation's commitment to deliver a true digital agriculture ecosystem where growers can access a broad and interconnected set of tools, services and data in a single, easy-to-use interface to optimize all farm management decisions.

The target for paid acres for the year remains at more than 50 million acres, more than a 40 percent increase over fiscal year 2017.

(A) Fiscal first quarter 2018 agricultural productivity gross profit includes a pretax restructuring charge totaling $3 million related to certain asset impairment charges, which is included in cost of goods sold.

(A) EBIT is defined as earnings before interest and taxes. Interest and taxes are recorded on a total company basis. We do not record these items at the segment level.

The Agricultural Productivity segment consists of the crop protection products and lawn-and-garden herbicide products.

Sales for Monsanto's Agricultural Productivity segment were $888 million for the first quarter of fiscal year 2018, up approximately 11 percent compared to the same period last year. The primary contributor to the segment's growth in the quarter was stronger pricing, as generic pricing for glyphosate continues to improve.

The company expects price improvements to continue for the rest of the fiscal year. In addition, volumes sold of XtendiMax^® Herbicide with VaporGrip^® Technology are expected to continue to grow with expanding acres of Roundup Ready 2 Xtend^® soybeans.