Monsanto Q2 2010 Earnings Call Transcript

123jump.com Staff
12 Apr, 2010
New York City

Sales fell 3.7% to $3.89 billion and net income fell 18.6% to $887 million or $1.60 a share. Gross profit declined 17% to $2.1 billion while gross margins declined eight percentage points to 54%. For the first six months gross profit for the company is down 30% or $1.2 billion.

Monsanto Company ((MON))
Q2 2010 Earnings Call Transcript
April 7, 2010 9:30 a.m. ET

Executives

Bryan Hurley – Head of Investor Relations
Carl M. Casale – Executive Vice President and Chief Financial Officer
Hugh Grant – Chairman, President and Chief Executive Officer

Analysts

Vincent Andrews – Morgan Stanley
Kevin McCarthy – Bank of America/Merrill Lynch
Donald Carson – UBS
Jeffrey Zekauskas – J.P. Morgan
Jason Young – Morgan Stanley
David Begleiter – Deutsche Bank
Anthony Pettinari – Citigroup
David Howard – Goldman Sachs
Lawrence Alexander – Jefferies & Company
Charlie Rentschler – Morgan Joseph

Presentation

Operator

Greetings and welcome to the Second Quarter 2010 Monsanto Company Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If any one should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. 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, Rob. Good morning to everyone on the line. Welcome to Monsanto''s second quarter earnings conference call. I''m joined this morning by Hugh Grant, our Chairman and CEO and by Carl Casale, our CFO. Also joining me are Will McAndrew, Manny Cruz and Ruben Mella, my colleagues in Investor Relations.

I''d like to remind you this call is being webcast and can be accessed at monsanto.com. A replay is also available at that address. We''re providing you today with EPS measures both on a GAAP basis and on an ongoing-business basis. In those cases where we refer to non-GAAP financial measures, we''ve 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 statement.

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 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 summarized on slide four, as will be the case throughout the year, the reset of the Roundup as massed from 2009 to this fiscal year colors all of the comparison 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 eight 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 re-establish and maintain historical price premiums as well as the fact that the inventory that was first into the market has a pronounced COGS effect reflecting higher production cost 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 to $12 per gallon range except for the U.S. where pricing fell slightly below that band.

Within seeds and traits, there was an increase in gross profit of 2% over 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 and a slightly better start to the second season in Brazil resulted in fewer corn acres lost than previously thought. 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 percent of trait royalties from licensees in the second half of the fiscal year compared with last year.

More pronounced is the fact that cost of goods dampen gross profit contribution within the corn portfolio. This reflects higher year-over-year COGS associated with our U.S. corn hedge position as well as the incremental launch year production cost for SmartStax.

Soybean 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 soybean volume will occur in the second half of the year. That was partially offset by stronger results in Brazil because of a larger soybean crop and a significant increase in the penetration of our first generation Roundup Ready trait.

Additionally in the quarter, our pre-tax restructuring expense was $84 million. This included $54 million charged to our U.S. corn cost of goods as we''ve made the decision to exit some product lines in our U.S. branded corn business and to streamline our product skews 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 seeds and traits, gross profit was down slightly versus last year as the second quarter effects influenced 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 a projected tax rate of 29% to 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.

Let me turn the call over to Carl so he can expand on our outlook for the remainder of fiscal year 2010.

Carl M. Casale

Thanks, Bryan, and good morning to everyone. As we cross the mid point of the year, we have a good view of our performance and how that instructs the remainder of the year. As many of you know my background is in operations so as CFO, my assessment isn''t just on the financials but how the business generates the financials. This clear linkage allows us to talk frankly about where we see the business at the mid point of the year.

Looking at both financials and the operations, the $1.70 we delivered in ongoing EPS in the second quarter is a solid quarter; however projecting from there it tells me that fiscal year 2010 will be more challenging throughout. That''s important because how we adjust from 2010 will set us up for longer term growth Hugh will discuss shortly.

So before we get into the detail, let me give you my view where we stand and we''re going for the remainder of 2010. Most importantly, if you go to slide five, we remain committed to delivering ongoing EPS in the $3.10 to $3.30 range we laid out at the beginning of the year but at this point, I expect that ongoing EPS will be at the lower end of that range. The $1.68 in ongoing EPS we''ve delivered through the first half of the solid data point to this end reflecting a little less than 55% of the low end of our full year range.

There are three drivers for this refinement in guidance. First as relates to season Traits, this was a year we knew was a leg work year and I think about progress pragmatically. In areas where we needed to cross thresholds to create the runway for growth we''re doing so. 2010 will give us the foundation we need whether that''s Latin American Traits, SmartStax or Roundup Ready 2 Yield.

However, while our broad portfolio in seeds and traits give us flexibility to maximize gross profit, there are not enough upsides this year to reach the higher end of our guidance. Given the reduced corn acres in Latin America and the challenges to our U.S. growth that I''ll speak about more, our seeds and traits gross profit will be more limited than we originally projected.

Second, in the Roundup business, the competitive dynamics within generic glyphosate remain acute resulting in systemic price competition. This has the potential to strain our full year Roundup performance and put pressure on our ability to meet our projected gross profit expectation.

We now see Roundup gross profit at plus or minus $600 million for the year. Third, offsetting the two impacts I just mentioned is greater operating leverage as a result of our restructuring efforts. We have uncovered some additional operational flexibility as a result of our lower SG&A run rate and that creates benefits in both 2010 and beyond.

Those are real challenges reflecting what''s proven to be a transition year, but against that backdrop, we are comfortable in the operational path to our 2010 guidance. It means we have a little more than 45% of our earnings to come in the second half of the fiscal year to get to the low end of our EPS range.

Practically, I would anticipate that third quarter EPS will be somewhat below last year. The balance of the second half growth will come in the fourth quarter as a fourth quarter transitions from a seasonal loss to a positive contributor to EPS reflecting the full effect of our SG&A leverage and supplemented by contribution from our Latin American corn and Roundup business.

Let me walk you through the details of how these factors come together in our outlook for the business. I want to begin with Roundup on slide six. As you recall, our Roundup priorities revolved around reducing branded prices to reset premiums, increasing our overall volumes and optimizing our low cost advantage. Through the first half of the year, here is the trends we see.

Volume is actually trending ahead of our plan as our full year volume projection is slightly better than our 250 million-gallon target. Today, worldwide net selling prices are within the $10 to $12 a gallon range for branded Roundup, however in the U.S., pricing remains slightly below that range as competitive generic inventory has moved out of the system slower than we would have anticipated depressing farm gate prices below what we expect with the current Chinese asset price in the range of $3 a kilogram or higher.

Just last week, another U.S. manufacturer of glyphosate filed an anti-dumping claim with the U.S. government over Chinese imports which speaks to the overall generic pressure we''ve observed. Further, we''re starting to see early evidence of competitors using generic glyphosate as a lost leader to sell other chemical products in the portfolios creating margin compression in the channel that threatens to keep farm gate prices from fully rebounding with seasonal refills.

In some cases we''ve used further incremental volume incentives to the channel to keep our premiums in line with these lower prices. Through the first half of the year, our gross profit has been limited.

In the second half of the year, we expect to sell a higher mix of branded volume at a lower realized cost per gallon which bridges our full year expectation. Throughout the year, we expect to fully utilize the $100 million to $150 million in plant sales incentives as well.

The primary application season in our biggest market still lies ahead and by the third quarter we''ll have stronger indicators whether we''ll see price improvement in the U.S. Absent stronger prices for the seasonal fill, I would expect branded pricing for the year to come in below our $10 to $12 price band. If that occurs, I believe that we may fall shy of our original $650 million to $750 million gross profit range for the year putting us in a more probable range of plus or minus $600 million in gross profit in this transition year.

As I shift to seeds and traits, I want to tackle both the strategic and operational factors for the year. Strategically, there were three things that matter for seeds and traits in 2010. Expanding penetration in Latin America and establishing SmartStax and Roundup Ready 2 Yield in their launch years. Given the trait expansion in Brazil and Argentina we discussed in the first quarter I feel good about that objective and now that we have the bulk of the U.S. sales in hand I feel good about where we''ve landed with SmartStax and Roundup Ready 2 Yield

If you move to slide seven here is where we stand. First of all we don''t have final totals since there are a small number of acres outstanding and seed returns yet to be determined, the acres for SmartStax and Roundup Ready 2 Yield are in the adjusted ranges we shared with you within the last month.

We expect all in acres for SmartStax to be right around three million-acres and Roundup Ready 2 Yield right around 6 million-acres. In context, that''s three times our historical average launch for a corn trait and the largest commercial scale launch in soybean.

Second and perhaps more importantly, what mattered was getting exposure on farm to facilitate adoption going forward. To that end we have broad trial. In Roundup Ready 2 Yield, we have more than 40% of our branded customers trying Roundup Ready 2 Yield this year. Likewise more than 20% of our branded customers are trying SmartStax in year one so we''re very comfortable that we have trial quantities with the right hybrids and varieties across a broad base of farmers to create the platform for adoption in 2011 and forward.

If I shift to the operational look, our projected U.S. growth for the year doesn''t offset the first quarter downside in Latin America. There are a couple of key reasons. Number one in corn, while we saw both higher volumes and pricing reflecting a mix improvement in our trade offerings, that benefit was offset by higher levels of cost of goods in the corn portfolio.

On slide eight, you''ll see that practically as we expect more than 75% of our branded U.S. corn portfolio will either be SmartStax or Triple-Stack, a positive step change from the 70% penetration in 2009. We''ve combined SmartStax and Monsanto Triple-Stack acres projected at 33 million-acres, we are seeing a mix upgrade realized through trait penetration.

The offset to this was largely driven through the cost of goods line where increased cost of goods related to our U.S. hedged corn position and the SmartStax launch cost limited the gross profit lift in the corn portfolio. Additionally, we booked a restructuring charge that hits the gross profit line.

Fundamentally, we''re accelerating the movement from existing hybrids into new trait packages that help enable the new product strategy that Hugh will describe. Number two, in soybeans we''ve previously discussed the timing shift as the late harvest in the U.S. shifted a greater percent of the full year sales into the second half of the season.

Finally, that limited U.S. growth also influences our share. Given the increase in corn and soybean acres projected last week from the USDA, our current sales volume would indicate our DEKALB corn share will likely be flat in this highly competitive year. Our branded soybean share is likely to be down pending a true up of acres and returns.

For the remainder of the year, we don''t expect the trajectory on the U.S. corn and soybean business to change significantly. So it''s unlikely there''s additional upside to be reflected in the second half of the season. From a practical standpoint, there are two areas to highlight related to earnings generation for the rest of the year.

First, cotton and vegetables delivered significant level of our remaining fiscal year gross profit and both are tracking well with our expectations and may potentially present marginal upside. Second, we expect positive fourth quarter this year will be driven by our SG&A leverage but will also include contributions from the corn business and Roundup in Latin America.

Practically, we expect a repeat of approximately $40 million of gross profit related to the Mexican distribution system we highlighted in the first quarter. Additionally, we anticipate an improvement over last years early Latin American season. That reflects a positive momentum from trait penetration as well as better outlook for corn acres compared with the drought conditions last year which also impacts Roundup sales across corn and soybean acres.

The last of the large drivers for the fiscal year performance is our operational leverage shown on slide nine. As we run the business, I focus on two things, the operating margin which yields gross profit and operating leverage which includes SG&A but not R&D. Tracking that operating leverage allows us to run our business more efficiently.

In the first quarter, we noted that SG&A was running below our budget plans and now that we''ve seen SG&A come in below for the second straight quarter I feel comfortable that we have a repeatable structural benefit. I expect that will continue for the rest of the year resulting in a four year SG&A in a $2.0 billion to $2.1 billion range largely in line with 2009.

This will result in an SG&A as a percent of sales that is closer to 17.5% to 18.5% in fiscal 2010. Likewise, we remain on track to deliver one-third of the $220 million to $250 million in annual cost savings in fiscal 2010 and the full savings in 2011 at a cumulative cost of $550 million to $600 million in restructuring cost.

Taken in combination, our SG&A reduction and realized SG&A savings create operational leverage that complements our operating plans in delivering on our earnings growth guidance. Finally, from an operations view, our commitment to deliver on our promise for earnings per share extends to cash generation as well.

If you move to slide 10, guidance for free cash flow remains in the $900 million to $1 billion range. Reflecting the fact that we expect to be at the low end of our EPS guidance we now expect operating cash to be in the $1.9 billion to $2.1 billion range. Capital expenditures were $119 million below expenditures last year and given that I expect the full year to be at the low end of our $750 million to $850 million range.

So even in a more challenging earnings environment, we''re converting earnings to cash. That speaks to part of our ongoing opportunity, as we continue to see disciplined balance sheet management supporting our growth opportunity.

Likewise, cash generation paired with a strong balance sheet highlights our opportunity to repatriate cash to our owners. We continue to view that as a priority and are focused on our current $800 million share repurchase authorization. We repurchased $124 million of stock through February bringing us to the halfway point of the current authorization.

Likewise, we''ve maintained our dividend reflecting our focus in returning cash directly to our owners. When I take a step back as CFO, I told you I focus on both the financials and the operations. That look leads me to a couple of conclusions for 2010.

On the minus side, while we can get to our cash flow goal and at the lower end of our ongoing EPS range, it''s been tougher than we planned even in a leg work year. On the plus side those execution issues are largely within our control so we''re applying the lessons to make the necessary adjustments. But none of this changes the fundamentals of our business and that''s true whether we''re looking at it financially or strategically.

We have a strong balance sheet and a discipline to turn earnings into cash, underscoring the strength of our growth opportunities and strategically, no one is better positioned to realize the growth in agriculture than we are. We clearly have the best products today and our unrivaled technology pipeline creates greater opportunity as we bring even greater innovation to farmers. We''re clear on where we stand. We''ve already begun to apply the lessons learned from this year to inform our operational approach going forward. With that let me turn the call over to Hugh.

Hugh Grant

Thanks very much, Carl, and good morning to everybody on the line. Carl just gave you our frank assessment about what the data points this year tell us about our 2010 outlook. We expect to get to the lower end of our $3.10 to $3.30 ongoing EPS range. It will be tougher than we would have liked but there is a path.

A higher priority for me is to ensure that we clear the path for more predictable and sustainable earnings in the future and that begs the question what do these data points tell us about where we stand, what we''ve learned and what that means for the operational path now through 2012.

Given the troubling economic climate that we''ve all endured for the better part of the last two years, the temptation for most companies would be to pin difficult times on that macro upheaval. We are not doing that. Rather, my focus is on the feedback and the lessons we can apply directly to how we do business.

To that end, the first half of 2010 has suffered some new market realities and has crystallized some lessons that shape our thinking which we show on slide 11. There''s three of these in particular. Number one, we refuse to achieve our growth objectives to the detriment of our customers.

In the course of the last two months, my team and I have gone out to the field and personally met with more than 1200 farmers ranging from large to small, from some of our best customers to some of our most critical. We heard consistently in these visits that we have the best products and we heard consistently that the value that we create with our technology innovation is real, but we also heard that how we share that volume with our customers can either be an enabler of growth or an impediment.

That tells me we can either make a stubborn push for the targets that we''ve set for ourselves and strain those valuable customer relationships or we can do more work with our customers and let the growth come more naturally. That''s going to change some things. I''d like to say it''s pure altruism but the reality is it''s the right thing to do for the business today and tomorrow.

That leads me to my second point. We are operating in a very dynamic competitive environment now. Our focus has been on bringing new products. Some of our competitors have been less successful matching our new product innovation and have been more focused in creating bigger price gaps against us.

That competitive price focus is a near term factor, so we have to be as flexible and as innovative in our pricing as we already are in our product development. That''s especially true now that we''ve entered the era of selling yield traits rather than insect and weed control ones. As the value proposition of our new products demonstrate themselves over our own first generation traits, I''m confident that we''ll earn a premium price position.

Likewise, we believe firmly that the long-term adoption of advanced technology is economically inevitable. We just have to be more conscious of how we''re getting that value to our farmer customers.

My third point shifts to Roundup. As Carl described, we''re seeing early evidence of margin compression at multiple points leading to lower farm gate pricing. If that becomes more of an observation and it gives way to new structural norms, I believe there will be a new ceiling on the long-term pricing environment in the glyphosate industry.

Given what we know right now with Roundup and with a different approach that we''ll take with our seed customers, I have to be pragmatic in my outlook and stay up front that we recognize its unlikely that we will reach our goal of doubling our 2007 gross profit by 2012.

As you can imagine, we didn''t reach this conclusion lightly. We recently confirmed the feedback that we got from farmers with a very rigorous internal evaluation. As an aggressive competitive organization, moving away from our original set of goals is difficult for us to accept but it''s the right thing to acknowledge now.

While there may be options to make an accelerated push for 2012, it''s clear that achieving that objective could involve making short term choices that to me are not in a long range interest of this business. So our operational plan going forward is focused on two keys, greater flexibility and implementation and greater certainty in our performance.

As I mentioned, we have just completed the first pass review of this plan, applying the lessons that I''ve just described. The upshot of that analysis is very clear. We expect to deliver midteens annual earnings growth going forward. We will couple that growth with the cost discipline to ensure that cash follows earnings so we expect to deliver strong annual cash and returning capital levels, but make no mistake, as our business evolves we expect to deliver double-digit earnings growth because of the opportunity that our technology and innovation continues to create.

As always, we''ll earn this right one selling season, one quarter and one year at a time. Our upcoming third quarter earnings report will be our first chance to back this with proof points. So I''ll commit that by then, we''ll present to you the critical milestones that turn this plan into reality for 2011 and the milestones that we''ll measure our progress by.

There are still some critical operational elements that we''ll finalize between now and then but I do want to walk you through our planning assumptions and the core building blocks that demonstrate that we don''t take these commitments lightly and that we''re coming out of the gate renewed, reenergized and ready for this future growth, so here is how I see this plan set up.

Firstly, we''re committed to Roundup. We''ve already done the massive reengineering that scaled the business for more than $1 billion that came off the gross profit peak and even with the potential for structural changes in the industry, we still believe that this can be a sustainable cash generating business, but perhaps more importantly, Roundups more than just a casual complement to our seed business. It''s a fundamental pillar that supports our expanding Roundup Ready trait franchise, so whatever we do, having a secure supply of Roundup is key to our future trait opportunities.

Our teams are working in ways that Roundup can be deployed more directly as part of our comprehensive weed control system that helps sell the value of our Roundup Ready trait products. If you take a step back and you consider our Acceleron seed treatment platform as an example, it''s fundamentally a package of commodity ingredients, but it''s delivered in a way that enhances the value of the seed that we sell, and this, I think, is a model for Roundup in the future.

In an era, where weed control systems and resistance management strategies are relevant to the seed purchase decision of farmers, we see a real opportunity for Roundup taking a more prominent role in helping create a total quality package of value for our customers.

As we begin to expand this total system with the inclusion of new trait platforms like Dicamba tolerance, the ability to offer a complete weed control system can be a true differentiator, so we''ll be looking at the options and how to do that.

Second, this is a plan built on a revitalized product strategy, as shown in slide 12. I said that farmers told us that we have the best products. I am convinced that we have an unmatched toolkit. Simply put, we have more tools at our disposal than we''ve had at any other point in our history and that''s in stark contrast to the situation that many of our competitors now find themselves in and frankly, this should be a bigger advantage than it''s been.

To be clear, our confidence in our products is unwaivering. I''ve seen the data and in particular, I believe that when farmers take stock of Roundup Ready 2 Yield and SmartStax this fall, they will see what we know that these products work. We have an expanding yield advantage over our competitors so this plant form advantage will allow us to grow our share and expand trait penetration so over the next two seasons, we''ll be more aggressive in deploying a full range of products, particularly in corn.

As I''m sure you''d expect, this plan continues to revolve around SmartStax which is the cornerstone product with an immediate fit for the core high value central cornbelt area. In the future, that will be complemented by our VT Double Pro and Triple Pro and we now see those three products coming together in a compelling value ladder as SmartStax and a family of refuge reduction products.

If you pair that with the potential for our first refuge in the back product in 2012, there''s a unique value that this family can offer to our farmer customers and when it''s deployed as a family, there''s a dual benefit. For us, we will create more flexibility to promote adoption and create the margin upgrade opportunity in new acres and more importantly for our customers, we''ll be providing more options as they evaluate the right technology progression for their farm.

And that leads me to a third point on slide 13. A revitalized product strategy enables us to evolve a more dynamic pricing model. As part of our listening session, with those 1200 growers, we have the feedback this year that for SmartStax and Roundup Ready 2 Yield adoption our all in up front pricing made the adoption decisions much tougher for the grower.

We''ve an experience with both pricing for penetration and now up front all in pricing that we employed with SmartStax and Roundup Ready 2 Yield and with that full data set, it tells me that penetration pricing is probably the better option both for us and for our customers.

We have always focused on maximizing trait penetration and creating the upgrade opportunity for our farmer customers, so our number one pricing priority is to embed our product planning with an approach that brings us back to the fundamentals of penetration pricing. If you apply this thinking to corn, we can use our product portfolio in combination with our established zone based pricing and we will create more products at more price points so in some cases we may adjust our value spread relative to competitors.

In others, we''ll bring in new products at brand new price points and even more, we''ll be looking to enhance our value proposition with the inclusion of additional meaningful benefits. This pricing strategy isn''t finalized today but broadly I see this as our tool to improve our value proposition for each farmer, invigorate adoption and grow into sustainable pricing and with more products at more price points we''re better positioned to meet the competition in the marketplace based on mix and not pure price.

At the end of the day, our opportunity revolves around incremental margin upgrades that we earn when a farmer sees the value and puts a new trait on a new acre on his farm. Make no mistake in this, we still have the premium priced products but we recognize that the App isn''t how we share that value that we create with the grower.

Finally and Carl mentioned this in his remarks, this is a plan that will have greater operational leverage than we''ve had over the past decade. Today, we have a different business than we were just three short years ago and this is one of the areas where that''s most clear.

As we''ve grown the SG&A that we''ve employed has grown proportionately, but of our core premise is that our opportunity is increasing the trait intensity and realized margin per acre, there''s a structural efficiency that we realize because it shouldn''t take more resources to simply add another trait to a bag that''s already headed to a farmers field.

That creates a structural benefit that carries forward and indicates to me that we can turn the greater percentage of our generated gross profit into earnings and hence cash. Not to be lost in that is the opportunity to use that cash more aggressively and repatriate it in ways that directly benefit our owners.

Likewise, we''re looking at that and we''ll be able to tell you more about our cash strategy as we lay out the stages of this plan going forward. So as I step back and I look at where we are and more importantly where we''re going I can tell you two things in closing.

Number one, this operational plan is something my executive team runs but perhaps more importantly it''s a plan that ultimately I own and my top priority is doing what''s right for the long-term health of this business while doing what''s right for our customers. Number two, as I think about the outcome of our planning process, the path may be somewhat varied from the prototype that we envisioned way back in 2007 but the destination is the same.

This is a path that will allow us to deliver strong earnings growth consistently in an ever changing market environment. We recognize that gross profit is a major enabler to creating growth and delivering earnings so strong seeds and Traits gross profit contribution is important.

With gross profit as the basis complemented by increased discipline in SG&A, we see significant growth in our operating margins without compromising our critical R&D investments. Quite simply, that allows us to generate annual earnings growth in the midteens, turn earnings into cash and reach strong returning capital levels.

As I conclude, there''s no doubt that in the last six months some things have changed and that causes us to do some things differently going forward, but just as importantly some things haven''t changed. We''re the leader in this industry, we have the best products and we have the best pipeline and those same fundamentals continue to speak to the opportunity that we believe in, in the future.

So with that, let me turn the call back to Bryan and open up the lines for your questions.

Bryan Hurley

Thanks, Hugh. So Rob, I think we would now like to open the call to questions. We''ve tried to leave a couple of extra minutes here for questions, as we typically do, I''ll ask that you please hold your questions to one per person so we can take questions from as many people as possible during this time and you''re always welcome to rejoin the queue for a follow-up question. So with that, Rob? Let''s open up the line.

Question-and-Answer Session

Operator

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two, if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Our first question is from the line of Vincent Andrews with Morgan Stanley. Please go ahead with your question sir.

Vincent Andrews – Morgan Stanley

Thank you and good morning everybody.

Hugh Grant

Good morning.

Vincent Andrews – Morgan Stanley

I guess, my one question will be can you help us understand what the basis for this midteens EPS growth and in particular what I''m talking about is let''s just assume the number for 2010 is $3.10. You''ve got 150 million bucks at least of Roundup made goods in the channel that if I''m correct don''t reoccur next year. You''ve got this charge now for the skew rationalization in corn, you''ve got some SG&A savings coming in and then you''ve got some winter production costs that is unclear how much if any of them are going to recur next year given the change in strategy so can you help us understand and you also have a corn hedge. Can you help us understand what the actual base is for this midteens growth?

Hugh Grant

Vincent, good morning. Thanks for the question. Let me try and frame how we think about midteens at this partner in our plan and process and then I''ll maybe ask Carl to just talk about some of the chapters in the book that you describe. As we think about midteens, we''re thinking about 13% to 17% as our band for growth. Some years will be stronger, some years will be weaker but that''s the kind of spread that we''re looking at going forward and I think it''s important to call that out so that, you know, you''re not guessing what we''re thinking about here, so that''s the kind of spread.

You''re right that there''s a number of moving parts in this year, some of which don''t reoccur next year and I''ll maybe ask Carl to do a broad based section on some of the areas that you described.

Carl M. Casale

Sure, Vincent. We are still pretty early in our planning process. Hugh mentioned the product strategy that''s going to be deployed and what the ultimate mix of those products is, Vincent, and to your point, how much winter nursery we choose to do is ultimately going to impact what COGS are and obviously margins as well and we''re still working our way through that so we''re not in a position today to say what that''s going to be.

On the Roundup side, one of the things we definitely believe that we''re seeing right now and we''re waiting to see whether it''s going to persist through the course of the year is the margin compression that we''re seeing in the channel. As generic products are moving out slower, but also we are seeing evidence that competitors are using glyphosate as a loss leader to sell other products in their portfolio and if that persists we might be looking at a lower level of GP target sustainably for the long term for the business and so all of those things are going to have an impact as well.

The hedging impact, that was a one-time effect that we took this year along with the cost of goods obsolescence that you mentioned from a restructuring standpoint. The obsolescence is clearly correlated to the change in product portfolio that we''re affecting right now, largely driven by obsolescence predominantly of Triple-Stack we''re going to move out of the portfolio to make room for these new products we''re going to sell that we think bring more value. The hedging was basically a dedesignation we did on some hedges. We basically hedge our corn position anywhere from one to two years in advance to basically lock in what our cost position is going to be. Those hedges were basically placed against higher expectations for market share that hasn''t occurred and so basically that''s the simple math on why we did that as well but simply the 13 and 17% bandwidth that we''re looking at right now where we sit is pegged off of the $3.10 that we''re planning to achieve for 2010.

Vincent Andrews – Morgan Stanley

Okay. Thanks so much.

Operator

Our next question is from the line of Kevin McCarthy with Banc of America.

Kevin McCarthy – Bank of America/Merrill Lynch

Yes, good morning. With the seed selling season largely behind you now and the USDA perspective planning numbers out last week, I was wondering if you could comment on your market share expectations for U.S. corn and soybeans?

Bryan Hurley

Yes, so the denominator continues to bounce around, Kevin, so the crops aren''t in the ground yet but if we were calling it today and I think Carl mentioned this in his call, we would think that our corn share would be around flat and in beans we would anticipate that we have lost share this year and that will be titrated based on the last minute shuffling on how big the crop is but I think those would be fair calls, I''m not happy about it but I would say that would be our best estimate today.

Kevin McCarthy – Bank of America/Merrill Lynch

And what would be the approximate magnitude of the loss of share in soybeans, Hugh?

Hugh Grant

We haven''t scaled that yet.

Kevin McCarthy – Bank of America/Merrill Lynch

Okay. Thank you very much.

Hugh Grant

Thank you.

Operator

Our next question is from Don Carson with UBS.

Donald Carson – UBS

Yes, a question on pricing for penetration. Based on our calculations, and of course lower corn and soy prices, it seemed you''re asking for about 50% of the value created, I guess traditionally you''ve priced more to get a third of the value creation. Is that the kind of shift you''re talking about and what if any implications does this have for your previous volume targets in 11 and 12 for both SmartStax and RR2?

Hugh Grant

Don, good morning. Thanks for the question. So let me try and frame this because when you talk about penetration pricing, the immediate reaction is broad based price cuts and I sat through a number of these feedback sessions with growers and they''re pretty clear in their feedback so here is how we''re thinking about it and maybe I''ll ask Carl to talk a little bit about volume, but in some areas geographically we''ll move in price relative to our competition and we''re not going to declare that today but directionally, we''ll narrow that gap, and in other areas, we''ll bring in a new suite of products and that will be based in corn largely on our new Double Pro and our VT Triple Pro and they will work underneath the SmartStax umbrella and those will give us the opportunity to create pricing lathers and bring growers into the products at different price point and a different experience point.

And then in the last area that we''ve been working on in the last couple of months, we''re taking a hard look at our value proposition where we can bolt on benefits and have the choice of the option of selling those at the same price and a great example of that is the migration from refuge reduction to rip and we had not priced rip into our future value expectations so that''s a benefit for the grower that would not be seen as a price move but would add a great deal or incremental value to that bag. So, we are looking for more products at more price points. Some of this will be straight price and some of it will be mix and I anticipate over the next two seasons that we''ll continue to command a premium because we sell better performing material. It''s how we present that and I think the feedback that I have personally from growers is if our price points were different, their adoption curves would be different so driving that experimentation in the first two years is critically important off the base of established intent and Carl maybe Don''s last question on volume going forward?

Carl M. Casale

Yes. So maybe just focus on 2011 and originally we said for SmartStax and Roundup Ready 2 Yield, for both of them kind of that 16 million to 18 million-acre range for 2011 so as I think about those numbers and think about demand, supply and scale, on the demand side with the number of users that we have trying this year, Don, we have more than adequate demand to support 16 million to 18 million-acres in both crops.

On the supply side, obviously we''ll have adequate supply of very strong varieties to meet the Roundup Ready 2 Yield target and on the 16 to 18 on corn, if you think about SmartStax as a family of products, the original SmartStax concept, the VT Double Pro, for that really low pressure acre out West and VT Triple Pro for the rotational corn grower maker when you add all of that together we would still be in that same range of availability for next year.

And then the last point, we''re still pretty early in planning but from a scale standpoint as we think about these three products I would think about the core SmartStax market being that corn on corn, high-yielding environment, core Midwest and that''s a 50 million-acre market, Don, just to help scale what our thinking is right now.

Donald Carson – UBS

Any preliminary thoughts on 2012, or you initially thought you might be above 30 on both and you approach 40 on the SmartStax family?

Carl M. Casale

Kind of where we''re at right now is focused on delivering ''10 and planning ''11, Don, so we haven''t gone there yet.

Donald Carson – UBS

Okay. Thank you.

Hugh Grant

Thank you very much.

Operator

Our next question is from the line of Jeff Zekauskas with J.P. Morgan. Please go ahead with your question.

Jeffrey Zekauskas – J.P. Morgan

Hi, good morning.

Hugh Grant

Good morning.

Jeffrey Zekauskas – J.P. Morgan

Just, I guess a two part question of clarification. In the press release as I understand it, the gross profit target for the ag productivity segment as a whole is now around 600 million and I guess what that means is that the Roundup number is somewhere in the high twos, all things being equal and previously, you were at roughly 650. I want to know whether that''s correct?

And secondly, in changing your longer-term target from a gross profit target to an EPS target, I guess when I try to translate it, it looks to me like you''ve cut your 2012 gross profit target by about $1.6 billion from maybe $8.7 billion to about $7.1 billion, so is that correct order of magnitude or is that not correct?

Carl M. Casale

Hi, Jeff this is Carl. I''ll start on the ag productivity piece and then turn it over to Hugh for the second part of your question.

Jeffrey Zekauskas – J.P. Morgan

Okay.

Carl M. Casale

On the ag productivity GP, we''re thinking about our ag Roundup business being in that plus or minus $600 million of GP.

Jeffrey Zekauskas – J.P. Morgan

Okay.

Carl M. Casale

The other ag productivity of about 3.25 is additive to that, not inclusive. Okay?

Jeffrey Zekauskas – J.P. Morgan

Okay.

Hugh Grant

And Jeff on the second piece the $1.6 billion, just in an order of magnitude approach seems high, it seems very high, so I think as we, I think today''s conversation was we are going to back off our commitment in doubling. We''re going to have a completely different product strategy around our seed business particularly in corn. We''re going to revert to our tried and trusted approach on penetration pricing to drive earlier adoption but your $1.6 billion, if you take the 13% to 17% and layer it on top of $3.10 feels tough, I''ll tell you from the school of hard knocks, I don''t think you''re going to be seeing us laying out long-term targets and the wisdom of saying that let me tell you where I''m going to be in five years time. We''re kind of retrenching from that today and we''ll give you some metrics, we''ll give you some guideposts, we''ll give you some of the key drivers. I think the cockpit is going to have a lot fewer dials on it going forward than what we''ve done in the last couple of years.

Jeffrey Zekauskas – J.P. Morgan

Okay. Thank you very much.

Hugh Grant

Thank you for your questions.

Operator

Our next question is from the line of Jason Young with Morgan Stanley.

Jason Young – Morgan Stanley

Good morning guys.

Hugh Grant

Good morning, Jason.

Jason Young – Morgan Stanley

So a question on just guidance in general going forward. When you look back at the history of guidance, how much of a competitive disadvantage do you think it''s given you in certain instances and the one that comes to mind that I think about is might have been three or four years ago when you laid out this, we think that Roundup sustainably can be a $1.8 billion gross profit business into the future and if I''m sitting in western China, I''m thinking Yee-Haw! Mom, let me go turn on the glyphosate plan right now.

Hugh Grant

Yes. I think the Yee-Haw! Mom was absolutely right and it kind of ties with the previous question on how many dials do you need in the cockpit. So we''ve said this morning that we started our planning process a little bit more than two months early. As we are working through that, we are critically conscious of how much of our hand we have to play to give you an indication of how we''re thinking about this revitalized approach and on the flip side, how much our hand we have to show that is the playbook for our competition and I think we''re going to be much more conscious of that, Jason, going forward, particularly as we pivot our new pricing approach and pivot our new product strategy and I know that''s going to frustrate members of your community but it''s the right thing to do for the long term health of the business.

Jason Young – Morgan Stanley

And I think from a long-term shareholder perspective, I would agree that that''s the right thing to do, and just on when you spoke about institutionalizing a lower run rate for SG&A and you''ve also kind of cut investing activities cash flow a little bit, can you just talk about other than the natural tail wind from increased trait penetration you''re getting there in helping in terms of SG&A what kind of actively is being cut and what is sacrosanct for both of those buckets?

Carl M. Casale

Sure, Jason, this is Carl. If you look at the structural benefit we gained from restructuring a year ago, probably the most dramatic change that occurred from an SG&A standpoint was the separation of our chemical sales organization from our seed sales organization and the resizing of the chemical organization given the fact that we had a billion plus of GP come out of that business.

In addition to that, the internal infrastructure from everything from finance to human resources, there was some simplification and additional benefit there. Where we haven''t gone, Jason, is basically looking at R&D as a source of leverage. That''s who we are as a company long term so we want to maintain the discipline that we''ve got in the SG&A run rates that we''ve got that we''re seeing flow through on basically the commercial side of the organization as well as what I would call the supporting infrastructure for the business and preserve the R&D capability because that is our life blood and our future.

Jason Young – Morgan Stanley

Great. Thanks so much.

Hugh Grant

Okay.

Operator

Our next question is from the line of David Begleiter with Deutsche Bank. Please go ahead with your question.

David Begleiter – Deutsche Bank

Thank you. You addressed SmartStax pricing, virtually $130-acre price you referenced last August. What price would you have had to had this year to realize your launch targets and can you ever get back to that $130 per acre price you referenced last August and if so how many years will it take?

Hugh Grant

So David, I think that''s one that we would reserve judgment on and we''ll give you some indicative pricing on it but it kind of ties in with two or three of the previous questions. We sold SmartStax. We saw some of the natural discount in that year-end through the trade as the last of that was sold out and the focus now is getting it planted and seeing what the yield benefits are and I think rather than me giving you an absolute price, we''ve done a ton of research in this spot, I''d rather lay out what our product strategy is and start coloring in the map on those value adders than leading with my chin in this relative to my competition right now.

David Begleiter – Deutsche Bank

Understood. Thank you.

Hugh Grant

So I hate to be coy but you can put that in the coy category, that one.

David Begleiter – Deutsche Bank

Thank you.

Operator

Our next question is from the line of PJ Juvekar with Citi. Please go ahead with your question.

Anthony Pettinari – Citigroup

Hi, this is Anthony Pettinari standing in for PJ.

Hugh Grant

Hi, good morning.

Anthony Pettinari – Citigroup

Good morning. Referencing your market share loss in soybean, can you just elaborate a bit on what is really driving that share loss? Is it purely farmer pushback on price and you holding price under the previous strategy or is it stronger competitive offerings? Can you just provide a little color and maybe what the lessons learned are for soy in 2011?

Carl M. Casale

Sure, this is Carl. On the soy side, I mean it''s just like corn. It''s a very, very competitive marketplace and basically what happened with -- when our Roundup 2 Yield came in at the lower end of the range, 100% of that offset wasn''t picked up by our Roundup Ready 1 and there was some competitive product that moved into that space and picked up market share there as well.

The lesson learned is it''s a very, very competitive market and as Hugh said we''re rethinking right now what our pricing strategy is in corn and soy so that we can reinvigorate the growth of the business.

Anthony Pettinari – Citigroup

Great. So with the new strategy, you expect to regain share next year?

Carl M. Casale

We''re still pretty early in our planning process and we''re not calling market share gains right now but strong unit volume growth across the business is an important metric of health just as we think about operating this business for the long term, but we''re not in a position to start talking about market share targets for next year yet.

Hugh Grant

Here is how I''d kind of look at it. We talked about this through the back end of the year. In the Spring of 2015, Roundup Ready 1''s patents will expire and the technology will be free in the market and the competitive dynamic if you think ''11, ''12, ''13, ''14, the competitive dynamic has proven the performance of Roundup Ready 2 Yield and it will be the performance of that versus a free technology, so as we think about ''11 and we think of the gap that was created this year, we need to make sure that farmers get that choice and see the value of this technology in a meaningful way in 2011. It''s as simple as that.

Anthony Pettinari – Citigroup

Great. Thanks.

Operator

Our next question is from the line of Robert Koort with Goldman Sachs. Please go ahead with your question.

David Howard – Goldman Sachs

Hi, this is David Howard sitting in for Bob. Just one question for you guys. In the new information that you gave us surrounding the 2012 time period, how much of this in seeds is derived from volume versus pricing?

Carl M. Casale

This is Carl. I''ll take a bit of a stab at it and maybe have Hugh add. What we''re talking about, where we''re at right now and what do we know. We know we''re resetting our product strategy going forward. We''ll have three unique and discrete products that we''ll be bringing to the marketplace and since those products bring different value they will be at different price points in the marketplace. And so really as we think about 2011, the two things that are really going to drive that and it relates to an earlier question as well is ultimately what''s our mix of those products and we''ll calculate that as we move the plan forward and also what''s the cost of goods impact or implications of that mix. Some of those products don''t carry any third party royalty obligations. Some of those products we may not have to take to winter nursery. And so that will bundle that the margin opportunity for those products are for 2011 but as Hugh said we''re not making any calls to 2012 at this point in time.

Hugh Grant

I''d only add one thing and it kind of ties back to Don''s question a lot earlier and that is we will be driving the product strategy that''s kind of back to the future so it will tie back our early experience on penetration pricing and when you take a penetration pricing approach, which is more focused on rapid adoption then I think it''s fair to assume that there will be a volume driver within that, so rather than the analytics on how big is the gap between pricing and volume, I think as we look at this new strategy we''ll be focusing more on that volume driver effect and we''ll populate that through a broader range of product offerings but also try and get faster, earlier trial by growers. And that was the feedback from 1200 growers this year and when you get told the same thing often enough, it becomes pretty compelling.

David Howard – Goldman Sachs

Yeah. All right, well thanks for the additional clarity.

Hugh Grant

Thanks for the question.

Bryan Hurley

I think we probably have time for one or two more questions, Rob, if that''s okay.

Operator

Sure. Our next question is from the line of Lawrence Alexander with Jefferies & Company.

Lawrence Alexander – Jefferies & Company

Good morning. Two quick clarifications. First, could you quantify expected price mix for corn and soy this year and second just to go back to Vincent''s question on the basing effect, would you be shocked to have $3.75 EPS in 2011?

Carl M. Casale

Well, the $3.75, as we mentioned earlier, we''re committed to $3.10 for 2010 and as we''re planning forward with what we see and again we''re pretty early in the process for 2011, we see $3.10 as a base and 13% of 17% growth range is kind of what we''re looking at right now so that''s the way I would think about that question for 2011. Regarding the corn/soy price mix, I''m sorry, could you help clarify that question for me a little bit.

Lawrence Alexander – Jefferies & Company

Just what do you think the total price mix contribution to sales would be in corn and in soy for this year, given that you have most of your orders in and by now?

Carl M. Casale

I would say that the biggest difference that we''re seeing is predominantly on the mix effect, particularly in corn is where the benefits come. As we mentioned though that''s been offset by the higher launch costs associated with SmartStax and Roundup Ready 2 Yield that we''ve talked about previously but also with the new news around the obsolescence that we chose to take as part of the overall strategy and basically the hedging issue that we had as well.

Bryan Hurley

Rob, I think we probably should wrap this up and take maybe one more question.

Operator

Sure. Our last question is from the line of Charlie Rentschler with Morgan Joseph.

Charlie Rentschler – Morgan Joseph

Good morning. We''ve talked about a lot of things but not about R&D and you''re spending at over $1 billion a year clip over $3 million a day and I wonder what your commitment is to that going forward.

Hugh Grant

Yeah. This is one of the first things that Carl looked at when we came into the job as CFO and as we talked about leverage this morning and as we talk about stepping back from our doubling in ''12, there''s a way you can achieve doubling in ''12. You just rip out R&D expense and I think you win the battle and lose the war quite frankly so as we look at leverage, we look at operational leverage but our commitment just to answer your question directly, our commitment and continuing investing in R&D is still held true.

We will obviously look for efficiencies but the heart of who we are is a technology-driven company and as we spent a lot of time in this call talking about pivoting a new product strategy about getting much more aggressive in the penetration pricing and product strategy approach but our firm belief and you hear this clearly from growers when you set down and talk to them in their own backyard, innovation is the trump card. Innovation that drives yield that makes the grower more efficient is the trump card, so as we look to the future out beyond 2012 and the long-term viability of this business, it begins and ends in our ability to deliver that innovation at growers here and around the world.

Charlie Rentschler – Morgan Joseph

So is this to say, Hugh, that you would not cut R&D over the next couple years?

Hugh Grant

We will look at efficiencies but we''re not going to sacrifice for the sake of making a long term doubling goal, we''re not going to sacrifice R&D projects.

Charlie Rentschler – Morgan Joseph

Thank you.

Hugh Grant

Thank you.

Bryan Hurley

Rob, with that, I think I hope we''ve left enough time here for questions but I''d like to save the last minute for Mr. Grant to make a couple concluding remarks.

Hugh Grant

Thank you, Mr. Hurley. I''ll be really brief. I think we covered a lot of ground this morning. I appreciate your patience. I appreciate the opportunity to walk through how we see the business today and give you the beginnings or the flavor of how we see a revitalized product strategy moving forward and rebuilding momentum in our business. So let me be really clear about this as we apply the lessons of this transition year in 2010, nothing and it kind of ties to the previous last question, nothing has changed in our fundamental view of the business.

We have the best products in this industry and today, we have more of them than anything else. We''re the leaders commercially and in our long term R&D pipeline. We have the experience, we have the agility to use these products and our leadership to use 2010 as a pivot point to regain momentum. Achieving our $3.10 in ongoing EPS this year as Carl has described sets us up for midteens earning growth, so 13% to 17% going forward enables the conversion of earnings to cash and the strong return in capital going forward and it puts us in a relatively elite class of companies when we increase the dependability and the certainty of doing that.

So I''m razzled here in that unique opportunity and focused on our implementation and I''m personally committed to this business. I see what a tremendous line up of products under development today and entering the marketplace can deliver through the next few years and beyond and we are looking forward to the opportunity to prove that out to you when we reconvene in our third quarter call. So thanks very much for joining us this morning.

Operator

This concludes today''s teleconference. You may disconnect your lines at this time. Thank you for your participation.