Monsanto Narrows Losses on Higher Corn Seed Volumes

Seed company also benefitted from higher sales of its new soybean technologies

m1Seeds major Monsanto Company (NYSE: MON) announced its Q4 FY16 and FY16 financial results on October 5th, 2016.

Monsanto provides agricultural products under two segments: Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment produces raw crop seeds, including corn, soybean, cotton, and canola seeds under the DEKALB, Channel, Asgrow, and Deltapine brands; and vegetable seeds under the Seminis and De Ruiter brands. It also develops biotechnology traits that help farmers control insects and weeds. The Agricultural Productivity segment manufactures and sells herbicides for agricultural, industrial, ornamental, and residential lawn and garden applications under the Roundup and Harness brands. Monsanto has a collaborative agreement with Novozymes to discover, develop, and produce microbial solutions. Read more about Monsanto’s financial results below.

Q4 FY16 financial highlights

Monsanto’s Q4 FY16 revenue grew 9% to $2.56 billion from $2.36 billion in the year-ago period. During the reporting quarter, Monsanto benefitted from lower production costs, more favorable exchange rates and higher sales of its new soybean technologies. While crop prices are still low and seed prices might not see many gains, farmers bought more of the company’s newest genetically modified soybean seeds, including Roundup Ready Xtend in the U.S. and Intacta in South America. Monsanto reported revenue growth despite the fourth quarter being typically its weakest, because revenue peaks earlier in the year when Northern Hemisphere farmers buy most of their seeds and crop chemicals. However, Monsanto is expected to face headwinds from diminished farm spending which has helped drive aggressive cutting of seed prices, and a glut of glyphosate, one of its biggest sellers.

On a segmental basis, Monsanto benefited from a 25% Y-o-Y jump in revenue from its Seeds and Genomics business, which reached $1.56 billion. The strong increase in Seeds and Genomics offset weakness in its Agricultural Productivity business, where revenue declined 9.7% Y-o-Y to $997 million during the reporting quarter.

During Q4 FY16, Monsanto’s selling, general, and administrative costs increased related to $280 million in PCB litigation settlement costs, after an agreement in September 2016 to settle its legacy PCB personal injury claims. Overall, operating expenses fell 10% to $1.40 billion in Q4 FY16 from $1.55 billion in the year-ago period. Helped by higher corn seed volumes and lower expenses, Monsanto’s net loss in Q4 FY16 narrowed to $191 million, or $0.44 per share, from $495 million, or $1.06 per share, in the year-ago quarter.

Full year FY16 financial highlights

Monsanto’s full-year FY16 revenue fell 10% to $13.5 billion from $15 billion in FY15. Despite strong penetration of Intacta RR2 PRO technology and record U.S. corn seed volumes, full-year net sales were down due primarily to currency headwinds and price declines in agricultural productivity. For FY16, net sales for the Seeds and Genomics segment were $10.0 billion, while net sales for the Agricultural Productivity segment were $3.5 billion.

For FY16, Monsanto’s net income plunged to $1.33 billion, or $2.99 per share, compared to net income of $2.31 billion, or $4.81 per share, in FY15. The lower income reflects costs associated with restructuring actions, Argentine-related tax matters, environmental and litigation matters and income from discontinued operations.

Other highlights

Cash flow: For FY16, net cash provided by operating activities was $2.6 billion compared to $3.1 billion in FY15. Monsanto delivered better-than-expected free cash flow of $1.7 billion in FY16, which was $100 million above the high end of the company’s expected range compared to $2.1 billion in free cash flow for FY15. The decline in FY16 free cash flow is a result of lower net income and an increase in trade receivables, primarily due to a decrease in sales of receivables to third parties, partially offset by lower seed inventories and the strong prepay volume in South America in Q4 FY16 for Intacta RR2 PRO.

Restructuring plan: Monsanto’s restructuring and cost-savings plans are on track to deliver approximately $380 million in annual savings in operating expenses and cost of goods sold at the close of 2017. However, overall operating expenses in 2017 are expected to increase slightly with inflation and the costs associated with the return to growth. This is expected to more than offset the savings from restructuring and cost-savings plans.

m2Bayer takeover: German drug and crop chemical maker Bayer has struck a $66-billion deal to acquire Monsanto on September 14th, 2016, which would make Bayer the world’s biggest agricultural supplier and enable it to take advantage of the converging pesticides and seeds markets. The $128-a-share deal, higher than Bayer’s previous offer of $127.50 a share, marks the largest all-cash deal on record. The potential Bayer-Monsanto deal, which is expected to close by the end of 2017, includes a $2-billion break-up fee that Bayer will pay to Monsanto should it fail to get regulatory clearance.

The proposed $66-billion Monsanto-Bayer deal would likely face U.S. antitrust hurdles because of an overlap in seeds business, particularly in soybeans, cotton and canola. The pending merger will also likely face an intense and lengthy regulatory process in the U.S., Canada, Brazil, the European Union and elsewhere.

m3Monsanto faces regulatory hurdles in India: In India, Monsanto is being investigated by regulators on whether it misused its near-monopoly on GM cotton seeds to inflate prices. India is Monsanto’s biggest market outside the Americas. Monsanto is considering quitting India because the proposed regulations mandate the sharing of its technology with local seed companies. Monsanto has also taken the government to court over a cut in the royalty it gets from seed companies for licensing use of its patented technology.

In August 2016, Monsanto, Bayer, Dow, DuPont Pioneer, and Syngenta have joined hands to form an alliance called the Federation of Seed Industry of India, to fight government restrictions on the seeds industry. Monsanto, which dominates the market for GM cotton seeds, has opposed recent regulations, stating that seed prices should be set by the market rather than by regulation.

Guidance for FY17

For FY17, Monsanto expects to achieve EPS of $3.83 to $4.35 on an as-reported basis. This includes an estimated $0.20 to $0.24 in anticipated restructuring charges, $0.10 to $0.13 in Argentine-related tax matters and $0.27 to $0.34 in proposed Bayer transaction related costs. On an ongoing basis, this translates into an EPS estimate of $4.50 to $4.90.

Monsanto also expects net cash from operating activities to be $2.4 billion to $2.8 billion, and net cash required by investing activities to be about $1.0 billion to $1.2 billion, assuming the successful sale of the Precision Planting equipment business and a meaningful first year investment in its dicamba production facility in Luling, Louisiana. Together, this translates into expected free cash flow of $1.4 to $1.6 billion for FY17.

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Stock Performance

m5Monsanto’s stock stood at $102.17, gaining 0.06%, at the close on Monday, October 17th, 2016, having vacillated between an intraday high of $102.38 and a low of $101.62 during the session. The stock’s trading volume was at 1,720,479 for the day. The Company’s market cap was at $44.90 billion as of Monday’s close.

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