Seed maker Monsanto’s 3Q net income drops 45 pct as cheap rivals hurt Roundup herbicide sales

By Christopher Leonard, AP
Wednesday, June 30, 2010

Monsanto 3Q net income sags on weak Roundup sales

KANSAS CITY, Mo. — Monsanto Co., the world’s biggest seed maker, said Wednesday its fiscal third-quarter net income tumbled 45 percent as it shrank its Roundup weedkiller business amid intense generic competition.

As Roundup sales have flagged, Monsanto last year said it was accelerating its long-term strategy to shift the majority of its business from chemicals and herbicides to genetically altered seeds. But the transition has been rougher than expected as growing generic competition from China drives steep declines in Roundup sales, and Monsanto has struggled to entice farmers to buy up its pricey genetically modified seed.

The effect of cheaper knock-offs on Roundup is akin to the drop in sales that drugmakers see when blockbuster treatments go off-patent. Drugmaker Pfizer Inc., for example, is striving to come up with a drug that can replace the sales it will lose when its $11.5 billion-a-year cholesterol blockbuster Lipitor starts competing with generic versions at the end of 2011.

In May Monsanto slashed its full-year earnings outlook as it cut prices on Roundup. On Wednesday, the company backed the revised guidance, continuing to expect 2010 earnings per share between $2.40 and $2.60 before restructuring costs. CEO Hugh Grant said Monsanto is implementing a new strategy to offer cheaper genetically engineered seeds along with its premium varieties that have multiple engineered traits.

Grant said the cheaper seeds are an answer to farmers’ concern that Monsanto’s new products, like its SmartStax corn seeds, are too expensive. That has opened the door to competitors who offered cheaper seeds carrying fewer traits. Soft demand kept corn seed sales flat at $1 billion in the third quarter, with soybean sales rising just 2 percent to $549 million.

“They need more products at more price points,” Grant said of farmers. “The beauty of that (request) is that it’s all within our control. We don’t have to go out and invent something.”

As Monsanto focuses on its seed sales, it has slashed the herbicide division that was once a pillar of its business, cutting 900 jobs. The majority of Monsanto’s Roundup sales are to farmers who use it to kill weeds alongside the company’s genetically engineered “Roundup ready” plants that withstand the herbicide.

Roundup is still effective, Grant said, although some weeds are growing resistant to it. But the herbicide just isn’t profitable now that prices are so low. Global Roundup prices have crashed since generic Chinese versions flooded the market in recent years, eating into the profit margin Monsanto can reap from each gallon.

Going forward, most of Monsanto’s Roundup sales will be a way to support the company’s Roundup ready seeds, said Monsanto Chief Financial Officer Carl Casale. With Roundup’s role as a revenue-generator diminished, the company doesn’t expect to see more volatility from its declining herbicide business.

The St. Louis company said its net income dropped to $384 million, or 70 cents a share, in the quarter ended May 31, from $694 million, or $1.25 a share, a year ago. Excluding $86 million in restructuring costs linked to downsizing the Roundup unit, profit would have totaled 81 cents per share.

Revenue fell to $2.96 billion from $3.16 billion a year ago, with sales in Monsanto’s agricultural productivity unit — which includes Roundup — declining 34 percent to $600 million.

Analysts had been looking for a profit of 79 cents per share on higher revenue of $3.17 billion, according to a Thomson Reuters poll. Monsanto shares slipped $1.12, or 2.4 percent, to close at $46.22 Wednesday. Earlier in the session the stock fell as low as $45.30, its lowest point since November 2006.

At $2.36 billion in sales, seeds and genomics represented the bulk of the company’s quarterly revenue. Monsanto said that 5 percent growth rate year-over-year is consistent with its expectations. It plans to continue to grow its research and development budget to bolster its seed pipeline, but said 2011 spending will rise at a smaller rate than it has over the past few years.

“Monsanto now becomes a pure-play seeds and traits company,” Casale said on a conference call with analysts Wednesday. “That means it’s seed and traits growth that matters.”

Monsanto’s strategy won’t work unless the company can deliver on its promise of squeezing more profits from its new lines of genetically engineered seeds, said Laurence Alexander, an analyst with Jefferies & Co.

Monsanto claims some new strains of engineered corn, for example, will be 20 to 30 percent more profitable than current varieties, Alexander said. But farmers will need to see the benefit of the seeds in order to be willing to pay the higher prices that will deliver those strong margins. If that doesn’t happen, Monsanto’s research and development dollars will have been wasted.

“If it turns out that you’re running to stand still, then it’s a lot less exciting,” Alexander said.

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