South American demand boosts Monsanto quarterly results

Completed merger with Bayer targeted for the end of calendar year 2017.

Monsanto Company delivered during Q1 2017 higher earnings per share (EPS) than the prior year thanks to the strength of the company’s South American business. In 2017, the company said it remains focused on delivering on its operational plan and key business milestones while simultaneously working with Bayer on the necessary steps to finalize the deal to merge the companies, which is targeted for the end of calendar year 2017. Additionally, in its annual research-and-development update, the company highlighted more than 20 phase advancements across the industry’s broadest pipeline.

 

“We’ve been very pleased with the strong support - especially from shareowners and growers - for the agreement to combine with Bayer,” said Hugh Grant, chairman and chief executive officer. “We expect the combination with Bayer to amplify the rate of innovation faster than either company could achieve alone, which will be critical in helping to increase grower productivity to meet projected demand in the decades ahead.”

 

Regarding this year’s annual pipeline update, Robb Fraley, Ph.D., executive vice president and chief technology officer, said the last several years brought record-breaking achievements for the company’s pipeline, with this year being no different. “To answer the challenges growers face, our teams have been successful in finding the best scientific disciplines for the job - whether it’s breeding, biotech, crop protection, biologicals or Climate FieldView products. And with Bayer, we truly see the opportunity to accelerate innovation, optimize integrated solutions and expand offerings - translating to significant benefits for farmers.”

 

Results of operations

 

Net sales for the fiscal year 2017 first quarter increased over the prior year’s first quarter to $2.7 billion versus $2.2 billion in the prior year period. Gross profit for the quarter increased to $1.3 billion versus the prior year period of $0.9 billion.

 

Selling, general and administrative costs were $585 million and research and development expenses were $370 million for the first quarter of fiscal year 2017. Total operating spend decreased with reduced restructuring expenses more than offsetting increases from pending Bayer transaction related costs, growth in commissions in South America and unfavorable impact of currency on spend.

 

The company’s fiscal year 2017 first quarter EPS on an as-reported basis was $0.07 which included $0.19 of pending Bayer transaction related costs. EPS on an ongoing basis was $0.21, well above the prior year’s ongoing loss of $0.11, driven by the expected strong start to the business in South America and currency effects.

 

Fiscal Year 2017 outlook

 

With the expected strong start in the first quarter and continued focus on return on innovation and financial discipline, the company remains confident in its fiscal year 2017 outlook. Despite the fact that the year-over-year change in currency rates was modestly favorable in the first quarter of fiscal year 2017, the company continues to assume that the change in rates will have a relatively neutral effect on a full year basis given the recent strengthening of the U.S. dollar against several currencies.

 

The fiscal year 2017 full-year as-reported EPS guidance is expected to be in the range of $3.97-4.45. These earnings are expected to translate into $2.4-to-$2.8 billion of operating cash flows and $1.4-1.6 billion of free cash flows, after deducting an estimated $1.0-1.2 billion of investing cash flows. These investing cash flows reflect the planned investment in the company’s dicamba manufacturing facility and assume the successful sale of the precision agriculture equipment business, the company said. On an ongoing basis, the fiscal year 2017 EPS is expected to be in the range of $4.50-4.90, reflecting expected growth for the year.

 

The company’s restructuring and cost savings initiatives remain on track, with the opportunity to deliver approximately $380 million in annual savings at the close of fiscal 2017 in operating expenses and cost of good sold, as compared to fiscal year 2015. However, setting aside pending Bayer transaction related costs and restructuring expenses, overall operating expenses in fiscal 2017 are expected to increase slightly with inflation and the costs associated with the return to growth of the business more than offsetting the savings.

 

For the second quarter of fiscal year 2017, the company expects as-reported and ongoing earnings per share that is approximately $0.20 to $0.50 better than the prior year. The company sees this first half earnings improvement as a reflection of the benefit from the sale of the Latitude business and the absence of a significant portion of the Argentine peso devaluation from the prior year. In the second half of the fiscal year, the company expects roughly 40 cents less in earnings per share benefit from strategic deals versus the prior year in addition to a more challenging currency environment than in the first quarter.

 

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

 

Net sales for the Seeds and Genomics segment in the first three months of fiscal 2017 were $1.8 billion. This included a greater than 25% increase in planted corn acres in Argentina and more than a 10% increase in corn acres planted in Brazil accompanied by double-digit price increases in corn germplasm in local currency in both countries. In the U.S., demand for year-one hybrids remains strong and the early read on the order book supports the company’s intention to grow genetic share.

 

The company said it continues to build on the momentum of Intacta RR2 PRO soybeans in South America as it remains on track to reach a target of 45 to 55 million acres in fiscal year 2017. In the U.S., demand for Roundup Ready 2 Xtend soybeans remains strong and the company is well-supplied for more than 15 million acres of the product, it added.

 

With the EPA approval for in-crop use of dicamba in-hand, the company has received nearly two-thirds of the necessary state approvals for both soybeans and cotton, and expects to have the rest before planting.

 

Moving beyond seeds, Monsanto said it continues to see major advancements in its Climate FieldView platform as the business and platform continues to evolve. The company recently released four new product enhancements for 2017 and these upgrades, together with outstanding demand for FieldView Drive and FieldView Plus, set the company up to reach its goal of 25 million paid acres. Simultaneously, the company expects to add several more partners to the platform in the coming year.

 

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

 

Though glyphosate volumes were up in the first quarter, net sales for the Agricultural Productivity segment in the first three months of fiscal 2017 were $802 million, down from $820 million in Q1 2016, reflecting glyphosate pricing headwinds that are expected to continue into the second quarter as the current global pricing is lower than the prior comparable period. As a partial offset to EBIT, the company recently signed an agreement to sell its Latitude wheat fungicide business for $140 million and expects to receive an EBIT benefit of approximately $85 million in this segment in the second quarter.

 

Moving beyond the first quarter, the company said it continues to focus on the launch of Xtendimax herbicide with VaporGrip Technology.

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