In reporting earnings results, Monsanto executives reinforced their confidence in the cumulative strength of the business, updating the full-year guidance to the high end of the range for both as-reported and ongoing earnings per share (EPS).
Monsanto also highlighted progress in its merger with Bayer as both parties continue to work toward completion of the transaction by the end of calendar year 2017.
“We are delighted to have delivered such an excellent first half and strong second quarter in the face of what is still a tough macro-economy for agriculture,” Monsanto chairman and chief executive officer Hugh Grant said. “While we're increasing confidence in the outlook for the rest of the year, our emphasis at Monsanto is where it has always been: on bringing innovation to growers. Our proven innovation and unique platform advantages position us well to meet the challenges ahead as well as make us an attractive, complementary partner for Bayer.”
Results of operations
Monsanto's net sales for the fiscal 2017 second quarter increased to approximately $5.1 billion, up from $4.5 billion in the prior-year period. Gross profit for the quarter also increased over the prior-year period, to $3.0 billion versus $2.6 billion. For the first six months, net sales increased to $7.7 billion, and gross profit was $4.2 billion, significantly outpacing the first half of fiscal 2016.
For the second quarter of fiscal 2017, selling, general and administrative costs were $657 million, and research and development expenses were $381 million.
The company reported 2017 second-quarter EPS of $3.09 on an as-reported basis and $3.19 on an ongoing basis — well above ongoing EPS of $2.42 in the prior year. The company pointed out that the more than 28% growth in both as-reported and ongoing EPS was driven by three things: more than $300 million of gross profit growth from its corn and soybean businesses, the absence of the approximately $180 million Argentine peso devaluation and a $83 million gain from the sale of the Latitude business recorded in other income for the quarter.
In the first six months of 2017, as-reported EPS was $3.16 and ongoing EPS was $3.39, compared to $1.80 as-reported and $2.25 ongoing in the previous year.
Fiscal 2017 outlook
Monsanto updated its fiscal 2017 as-reported EPS guidance to be at the high end of the range, at $3.95-4.44. On an ongoing basis, fiscal 2017 ongoing EPS is also expected to be at the high end of the range of $4.50-4.90. This reflects the company's increased confidence in the growth expected for the year and assumes that the change in currency rates will have a relatively neutral effect on a full-year basis.
From a gross profit perspective, Monsanto continues to expect the Seed & Genomics segment gross profit to increase year over year by mid-single digits as a percent. Within its Ag Productivity segment, gross profit is still expected to be in the range of $850-950 million, although now at the lower end of the range.
For third quarter, the company expects as-reported EPS to be roughly flat due to the absence of an Argentina-related tax matter call-out of 50 cents per share, mostly offset by the expected decline in ongoing EPS; the absence of the alfalfa deal, which equaled roughly 34 cents per share of earnings last year, and the volume timing shift from the third quarter to second quarter in the European and U.S. corn businesses.
For the full year, Monsanto now anticipates these earnings to translate to the high end of the range of $1.2-1.6 billion of free cash flow, reflecting operating cash flow at the high end of the range of $2.4-2.8 billion and capital expenditures of $1.2 billion for fiscal 2017.
Overall operating expenses in 2017, excluding the pending Bayer transaction-related costs and restructuring charges, are expected to increase slightly with the growth of Monsanto's business.
The Seeds & Genomics segment had net sales of approximately $4.2 billion in the second quarter of 2017, contributing to the first-half total of $6.0 billion.
“In corn, quarterly growth came mainly from the U.S., Europe and Brazil. U.S. corn growth related primarily to improved cost of goods sold with the return of a more normalized production plan, while Europe and the U.S. combined had a volume timing benefit of roughly $40 million, stemming from strong grower demand,” the company said.
Brazil's double-digit price mix lift in local currency continued in the second quarter, and Monsanto said it has garnered strong demand for its VT Triple PRO trait hybrids. In Argentina, Monsanto estimates even greater acreage growth than previously expected — at more than 40%.
For soybeans, the company expects to deliver greater than 25% growth in global soybean gross profit. U.S. state approvals are now in place for the key soybean-growing states Monsanto is seeking for Xtendimax Herbicide with VaporGrip Technology, with the exception of Arkansas.
The Environmental Protection Agency recently approved numerous tank mixes for the chemistry, including glyphosate. With these approvals, as well as strong seed supply, the company now expects 18 million acres of Roundup Ready 2 Xtend soybean varieties to be planted in the U.S. in fiscal 2017.
In South America, the performance of INTACTA RR2 PROTM soybeans continues to demonstrate the advantage over competing varieties, adding to Monsanto's confidence in the 45-55 million-acre range for the technology in fiscal 2017.
Monsanto said it also anticipates high grower demand for Bollgard II XtendFlex cotton, which is now expected to exceed 4 million U.S. acres in fiscal 2017. Overall, cotton gross profit is expected to grow by more than 35%, with the strength of Bollgard II XtendFlex in the U.S. and the return of high-value acres in Australia.
Monsanto continues to enhance its digital tools for agriculture, with acreage expansions for the Climate FieldView platform, and remains on track to deliver 25 million paid acres this fiscal year. Geographically, experience with the platform is growing in the U.S., Europe, Canada and Brazil, and interest in joining the Climate FieldView platform has been strong; Climate is currently in discussions with more than 25 potential technology providers.
Net sales for Monsanto's Agricultural Productivity segment in the first six months of 2017 were $1.7 billion. Second-quarter net sales for the segment were approximately $888 million. Fiscal 2017 gross profit for this segment is still expected to be in the range of $850-950 million, although now at the lower end of the range. The company said this reflects year-over-year price declines in glyphosate-based herbicides in the first half of the year, offset by anticipated higher volumes and modest glyphosate price improvements in the second half of the year.
“The gross profit outlook moves to the lower end of the range because the anticipated benefit from select strategic deals in Ag Productivity shifted to other income instead of gross profit in the second half of the fiscal year,” the company explained.