Replies to post #35 on Monument Circle Acquisition Corp (MON)

[Democritus_of_Abdera]

Yield, a central theme of the Investor Day Conference...

A repeated theme in the investor day conference was that MON’s strategy is to maximize yield with the presumption that yield is more important than price when farmers choose a seed source. Hugh Grant (CEO) believes that ultimately MON will be able to double corn yields over that extant today.

Ted Crosbie’s presentation demonstrated that it is easy to spin the statistics on yield data. Ted is VP Breeding. In my opinion, the spin is effective because mean values for yield data are presented without measures of variance and there is limited or no statistical analysis.

The lack of statistical rigor and the implied lack of farmer interest in statistical analysis will negatively impact MON’s success in a yield focus strategy. The reason being that yields vary from farm to farm for reasons other than seed potential; local weather patterns, soil character, and farmer competence will add to the variance. Thus, it will always be easy for a competitor to cherry pick the data and find a favorable comparison. When statistical measures are not provided, it is hard to judge who is cherry picking and who is presenting a balanced view.... The default view will likely be that each company has chosen data to support their case and must be taken with a grain of salt...

Price comparisons, on the other hand, are easy to understand and likely will drive purchase decisions when yield data is confusing. Thus, I think that MON’s presumption that yield is more important than price when farmers choose seed is flawed.

I think that if Monsanto is to be effective with a yield-focused strategy, they need to add statistical measures to their presentations and they need to focus upon educating farmers on how to use these statistical measures to identify inappropriate spin of yield data by competitors. It is not hard to add a standard error of the mean bracket to the bar graphs and to explain that yields are significantly different only when the standard errors do not overlap.

[Democritus_of_Abdera]

Re: Reconfirmation of Guidance...

It is true that Monsanto constantly reconfirms the 2007 guidance for 2012 profit targets; i.e. that it will double the gross profit line between 2007 and 2012 and that it is still on track in 2010. The 2010 reconfirmation suggests that the larger than expected drop in Roundup revenue likely will be compensated by a larger than expected increase in Seeds & Traits revenue.

But more important with respect to near term price action, MON has been trying to reduce/adjust expectations for some upcoming financial comparisons. In particular (with quotes from Carl Casale’s Recent Biennial Investor Event presentation):

1. earnings will be lower next quarter (year-on-year) ...

There’s a couple other points I’d like to make about how the year is going to unfold. And the first is just the sequence and timing of earnings throughout the year. With the Roundup reset what we’re going to see is more of a return to our historic pattern of earnings, which is basically breakeven to a slight loss in the first quarter, virtually 100% of our business done in the second and third quarters roughly split 50-50 to perhaps 60-40 second and third and returning to a loss again in the fourth quarter.

2. there will be a dramatic drop in cash flow next quarter (year on year) ...

So as we think about the year right now although our order book is very, very strong, really we’re going to get a much better line of sight on how the business is going to unfold as we move into the second quarter. The other point that I’d like to make is on cash flow for the first quarter. Last year we generated or had a source of approximately $128 million of cash. We’re anticipating that the first quarter of this year will be a use of cash on the order of $1.8 billion. ... we’re not going to have the operational benefit of that [Roundup] as we look into 2010 ... we’ve actually shortened our selling terms to some of our customers and ... what that’s done is move cash from the first quarter into the fourth quarter.... we have basically partnered some of our customers directly with commercial banks for financing. And so we don’t have the benefit of that cash nor do we have the use associated with it..... a year ago we received the proceeds from a Posilac business divestiture, which was $300 million. And of course that was a one-time event, which isn’t going to be repeated as we look to 2010.

3. there will be an increase in receivables and reduction in inventory next quarter (year-on-year) ...

Now what we’re going to see in 2010 is we will see a slight increase in receivables, that’s by design because as I mentioned earlier, we want to re-establish our position in the Roundup business. We’re going to sell more volume than we did a year ago, and that’s going to generate a higher level of receivables. However, at the same time, we’re going to see reduction in inventory year-on-year. And that’s a function of two things. We are going to reduce inventories as we transition from Roundup Ready 1 to Roundup Ready 2 Yield and we’re also going to see reduction in inventories as we transition from our Triple Stack products to our SmartStax products.

4. there will be decrease in operating cash next quarter (year-on-year) ...

Now a lot of times you correlate growth particularly in emerging markets to increases in working capital, but I go back to the example that Brett used. Brazil has been a high-growth market for us now for some time. It’s going to be a high-growth market for us as we work through the rest of this operating plans for 2012. Brazil also has a lowest day sales outstanding in the company today. So you can’t manage this growth through strong discipline in receivables and inventory without having to compromise the results and of course that obviously then allows to translate earnings growth into operating cash.

[Democritus_of_Abdera]

Hugh Grant’s Introduction to Biennial Investor Day – Highlights ...

...The primary investment thesis for Monsanto is that the yield – the demand curve is alive and well. And the demand continues to escalate despite recessionary measures. And that demand curve can only be met by increasing yields and companies that deliver innovation to propel yields forward stand at least an even chance for winning. And as we look to the future, we forecast the capacity to double yields or using a third less stuff. And the majority of the stuff that growers use around the world are water and fertilizers....

..one of the projects that will advance phases is our Refuge-in-a-Bag for SmartStax, and we announced this morning that we now anticipate making regulatory filings for Refuge-in-a-Bag SmartStax by the end of December this year, which is the next level for sophistication for SmartStax and delivers another level of unique value to the growers....

...And if you think about what’s happened in the last 24 months globally, we’ve seen an acceleration in regulatory approvals. And things that two years ago would have been a champagne moment, we now take in our stride and move on to the next day. But nowhere is that more true than in Latin America. And if you look at the pace of regulatory approvals and the acceleration in Brazil and Argentina, it’s really quite significant in the last two years. In fact in the last month, you now see Mexico green lighting field trials for biotech corn for the first time.... I think by 2012, we are going to see predominantly stack markets in both Brazil and Argentina....

...The next two to three years for us, the name of the game for us is how do we upgrade acres to these new platforms. .... And I think this inflection point when you look ‘10, ‘11 and ‘12; the inflection point here is mix and volume matter more than pure pricing....

...So we are confident because of SmartStax, because of Roundup Ready 2 Yield and because of the accelerated pace of regulatory approvals in Brazil and Argentina and I sincerely hope before too long in Mexico....