Monsanto Company returns to EPS growth with strong first quarter results

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In the first quarter, Monsanto Company delivered higher earnings per share (EPS) than the prior year thanks to the strength of the company’s South American business. In 2017, the company 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 today, the company will highlight more than 20 phase advancements across the industry’s broadest pipeline, which is focused on helping farmers address current and future challenges.

“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.”

“The last several years have brought record-breaking achievements for our pipeline, and this year is no different,” said Robb Fraley, Ph.D., executive vice president and chief technology officer, regarding this year’s annual pipeline update. “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. (For a reconciliation of as-reported EPS to ongoing EPS see note 1).

Cash Flow

For the first three months of fiscal year 2017, net cash provided by operating activities was $1.5 billion, compared with net cash provided by operating activities of $1.4 billion in the first three months last year. Net cash required by investing activities for the first three months of fiscal year 2017 was $327 million, compared to $336 million for the same period of fiscal year 2016. Net cash required by financing activities for the first three months of fiscal year 2017 was $655 million, compared to net cash required of $2.4 billion for the same period of fiscal year 2016. Free cash flow was a source of $1.1 billion for the first three months of fiscal year 2017, compared to $1 billion for the same period of fiscal year 2016. (For a reconciliation of free cash flow, see note 1).

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 to $4.45. These earnings are expected to translate into $2.4-to-$2.8 billion of operating cash flows and $1.4-to-$1.6 billion of free cash flows, after deducting an estimated $1.0-to-$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. On an ongoing basis, the fiscal year 2017 EPS is expected to be in the range of $4.50-to-$4.90, reflecting expected growth for the year. (For a reconciliation of free cash flow and as-reported to ongoing EPS, see note 1).

The company expects roughly $100 million of gross profit from strategic licensing deals towards the end of the fiscal year which is anticipated to be roughly split between Seeds and Genomics and Ag Productivity. Seeds and Genomics segment gross profit is expected to increase to mid-single digits as a percent year-over-year, with soybean gross profit alone expected to grow by more than 20 percent, driven by new trait penetration and an anticipated reduction in cost of goods sold. In corn, growth is expected to come from global genetic share gains and global germplasm price mix lift in local currency that is flat to up low-single-digits, in terms of percentages. The company expects global corn acres to be roughly flat, with declines in U.S. corn acreage offset by the early increases in South America.

The company adjusted Ag Productivity gross profit to the expected range of $850-to-$950 million, reflecting year-over-year price declines in glyphosate-based herbicides in the first half of the year, offset partially by the benefit of licensing opportunities and expected higher volumes. The adjustment in gross profit outlook is a result of the approximately $85 million benefit from the sale of the Latitude® wheat fungicide business that was ultimately recorded in other expense, net for the segment, as opposed to gross profit as anticipated.

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. The expected tax rate for the year remains in the range of 25-to-28 percent.

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.

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