Monsanto Reports Lowest Net Income in 5 Years

Seed company’s dismal earnings linked to lower farmer spending and commodity prices

Source: Company's Website
Source: Company’s Website

Seeds major Monsanto Company (NYSE: MON) announced its Q3 FY16 financial results on June 29th, 2016. Monsanto provides agricultural products for farmers worldwide 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 the Monsanto’s financial results below.

Q3 FY16 financial highlights

Monsanto’s Q3 FY16 net sales declined 8.5% to $4.19 billion versus $4.58 billion in the prior year period, owing to lower farmer spending amid weak agricultural commodity prices. The Seeds and Genomics segment’s net sales for Q3 FY16 inched up 0.4% to $3.2 billion on account of new corn hybrid introductions across key corn growing regions. The Agricultural Productivity segment’s net sales for Q3 FY16 declined 29.1% to $982 million. Monsanto’s cost of sales fell 1.8% Y-o-Y to $1,809 million during Q3 FY16, while gross margins contracted 300 basis points to 56.8%.

Monsanto has cause for worry as sales of its genetically modified soybeans, one of its biggest earners, fell by 17% during Q3 FY16. Also, higher Chinese production of generic glyphosate weedkiller is pushing down prices for Roundup, its bestselling herbicide.

Selling, general and administrative costs were higher at $729 million, while R&D expenses amounted to $387 million in Q3 FY16. Operating expenses, which account for 27% of the total revenue, increased 3.6% Y-o-Y to $1,131 million and interest expenses were up 4.2% to $100 million during Q3 FY16. Gross profit margins during the quarter under review declined due to lower Roundup pricing and the absence of the $274 million licensing deal with Scotts. As a result, gross profits for the quarter fell to $2.4 billion versus $2.7 billion a year ago.

Monsanto’s Q3 FY16 earnings tumbled 20% to $0.96 billion versus $1.20 billion in the year-ago quarter owing to higher costs and R&D expenses. EPS on an as-reported basis was $1.63. On an ongoing basis, EPS declined by 13.5% to $2.17 versus $2.51 in the year-ago quarter. The ongoing Q3 FY16 EPS excludes $0.54 million for restructuring charges, environmental and litigation matters and a net charge of $219 million for tax matters related to the Argentina business. EPS performance for the quarter was impacted by the absence of the Scott’s licensing agreement, glyphosate pricing declines, Roundup Ready 2 Xtend® launch delay costs, and India cotton pricing regulations. These factors were partly offset by the positive impact of share repurchases and increased row crop licensing gross profit.

Full year FY16 outlook

Monsanto’s full-year FY16 as-reported EPS is expected to range between $3.36 and $4.14, and ongoing EPS to range between $4.40 and $5.10 given increased headwinds in Q3.

Source: Company's Presentation
Source: Company’s Presentation

Net cash provided by operating activities is expected to be $2.2 billion to $2.6 billion, and net cash required by investing activities to be approximately $900 million to $1.1 billion for FY16.

Monsanto expects gross profit growth from its Seeds and Genomics segment to be down just under 5% for FY16. Agricultural Productivity segment gross profit is predicted at the lower end of the $900 million to $1.1 billion range for FY16. The Company expects to save $165 million to $210 million from its restructuring actions in FY16.

Other highlights

On June 29th, 2016, Monsanto signed two licensing deals to use genome editing to improve the development of agricultural products. The first deal was with Nomad Bioscience, a German biotech company focused on gene-editing research. The deal gives Monsanto the rights to use Nomad’s proprietary technology to its genome-editing projects aimed at benefiting its agricultural crops. Separately, Monsanto has inked a similar type deal with Israeli’s TargetGene Biotechnologies, a company that also specializes in genome-editing technologies. Monsanto has been granted an exclusive license to TargetGene’s novel and proprietary Genome Editing Engine platform to deliver continuous improvements in agriculture.

Stock Performance

M3Monsanto’s stock stood at $101.32, up 2.02%, at the close on Friday, July 1st, 2016, having vacillated between an intraday high of $103.98 and a low of $100.99 during the session. The stock’s trading volume was at 6,025,094 for the day. The Company’s market cap was at $45.17 billion as of Friday’s close.

Monsanto’s disappointing earnings could strengthen German drugs and chemicals group Bayer AG’s plan to make another attempt for a takeover. Bayer had made an unsolicited takeover proposal to Monsanto on May 19th, 2016. However, Monsanto had rejected Bayer’s $53.7 billion offer, saying it was too low. It now remains to be seen whether Monsanto would be open for merger talks in the light of the recent dismal performance.

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