[Wall Street Journal articles below]
Monsanto should be thriving.
The company has helped develop most of the world's biotech crops; it produces the best-selling agricultural chemical of all time; and after a series of huge acquisitions, it can now call itself the world's No. 2 agricultural seed company, behind the Pioneer Hi-Bred unit of DuPont.
Yet profits are in a slump, its shares have tumbled nearly 50 percent in two years, and the company continues to take a beating over the introduction of genetically altered crops.
Hugh Grant,
Monsanto's new chief executive,
is the company's third in three years. He stands
in a company corn greenhouse in suburban St. Louis.
In all the turmoil, the Monsanto Company even lost its second chief executive in three years, Hendrik A. Verfaillie, who stepped down in December. Only this week did it name a successor — Hugh Grant, a longtime company executive who most recently has been chief operating officer.
Despite all the company's advantages, analysts say, its progress has been impeded by heavy spending, management shake-ups and the unexpected costs of trying to win the world over to those altered crops.
"Europe is really the stumbling block for global acceptance, and that's a problem," said Leslie Ravitz, an analyst at Morgan Stanley.
And Andrew Cash, an analyst at UBS Warburg, noted that "part of the problem was their infrastructure is for a global market." He added, "If the world market had accepted biotech two years ago, or even now, they'd be much more profitable."
Monsanto executives, for their part, say they are right on course. While Mr. Grant, on his promotion, acknowledged that "we're at an important crossroads," he stressed his longstanding belief that altered crops "have great potential."
The company has successfully moved away from a dependence on chemicals, and biotech profits are growing, top executives say. Indeed, this year, for the first time, Monsanto predicts that over half of its agricultural profits will come from something other than chemicals.
Biotech genes, one of Monsanto's newest businesses, are expected to produce about $600 million in gross profits this year, analysts say.
Chemicals — a mainstay since the company's founding in 1901 — are in sharp decline.
"Fifteen years ago, we were digging holes in the ground, extracting oil," Mr. Grant said in a recent interview at company headquarters in St. Louis, before his elevation to chief executive. "We were making nylon. We were a fibers company. Then we were a fine-chemicals company. Now we're a seeds and biotechnology company."
This is what Monsanto wanted to become, not an aging chemical concern but a new-age biotech company that would use the tools of genetic engineering to help transform the world of food and agriculture.
But Monsanto spent dearly to get here, investing billions in the last decade to acquire huge seed companies and to develop genetically altered crops.
The new Monsanto essentially has two main products: genetically altered seeds and Roundup, the herbicide that works in tandem with some of the company's most popular biotech crops. Roundup now commands a remarkable 90 percent of the world's herbicide market. And because Monsanto was a pioneer in genetically manipulating plants, it controls over 90 percent of the market for biotech "traits," the genes that transform ordinary seeds into new types of crops.
Still, profits have been lackluster for two years, analysts say, partly because of weakness in Latin America, where inventory and management problems have taken a toll.
Investors say Monsanto has also been weighed down by its heavy cost structure. Return on equity is weak, analysts say, because of the roughly $10 billion the company spent in the last decade to acquire seed companies and market about a dozen varieties of genetically altered crops.
"They don't even make their cost of capital, so that means every quarter they're actually destroying value," Mr. Cash, the analyst, said. "They introduced biotech traits in '95, and now there are 140 million acres. That's astounding. So it must be costs; it can't be sales."
Weak profits have sent Monsanto shares down, to $20.05 at the close of business yesterday from a peak of $38 in June 2001.
Still, most analysts agree that Monsanto has no real peer in biotech crops. "There's nobody else in the input traits that's competitive," Mr. Ravitz of Morgan Stanley said. "They are way ahead there."
Monsanto's biggest rivals — DuPont, Syngenta and Bayer — are working to develop their own biotech crops, but only a handful of products have reached the market. Some of the best prospects are two to seven years away, the companies say.
"Part of it was our late entry into the biotech arena," said Richard L. McConnell, the president of Pioneer Hi-Bred, DuPont's seed unit.
DuPont and Syngenta, however, are about to release products that go head-to-head with some of Monsanto's best-selling biotech traits. And some analysts predict that those two companies will capture a significant share of the market — and perhaps pressure Monsanto to lower its prices.
In the meantime, the competitors are content to profit from Monsanto's biotech traits, which are licensed to most of the world's major seed companies.
Sales of soybeans are growing because of Monsanto's biotech traits, said John Sorenson, the president of Syngenta Seeds North America, referring to the growth of Monsanto's popular Roundup Ready soybeans, which are genetically altered to withstand being sprayed by Roundup. "It's been a very profitable segment for us."
When biotech crops were first planted commercially in the United States, in 1996, Monsanto was not the first to market them, but it was the most aggressive.
That year, about 2 million acres of biotech crops were planted nationwide; today over 100 million acres are.
Roundup has been one of the biggest beneficiaries of this boom. Although it was already a blockbuster product, sales soared to over $2.4 billion in 2001, making it the best-selling agricultural chemical ever.
More than 80 percent of the soybeans in the United States and Argentina, the world's biggest exporters, are now genetically altered. And much of the land they are grown on is sprayed with Roundup.
To compete, other seed companies plan to introduce a series of "output" traits, or genes that could improve the quality or taste of crops like corn, soybeans, canola and tomatoes.
Competitors say output traits will be even more profitable, and experts say that contest will inaugurate the real biotech race.
"It's like a game of Monopoly," said Tray Thomas, the president of the Context Network, an agribusiness consulting group in West Des Moines, Iowa. "Monsanto has hotels on Boardwalk and Park Place. But a lot of the game is yet to be played."
Monsanto says it plans to maintain its lead by devoting nearly 80 percent of its more than $500 million in annual research and development spending to biotech traits. Its rivals, by their own estimates, devote closer to 20 percent.
But therein lies a problem, analysts say: Monsanto's research spending has held down profitability. "They're generating gross profits, but they invest it back into the business," Mr. Ravitz said.
Monsanto also faces problems abroad, where genetically altered crops are sometimes scorned. Europe is showing no signs of easing its restrictions, and is in fact considering tightening some of them, which would make it more difficult to export biotech crops there. "Europe has been a major problem," Mr. Thomas said. "A lot of farmers are worried that they'll plant things they won't be able to sell in Europe."
Problems like that have inflated the cost of commercializing biotech crops, not just in Europe, but in other nations that follow Europe's lead.
In the United States, the biotech industry abandoned altered potatoes and delayed the marketing of altered wheat because of consumer health concerns. Monsanto says the crops have been properly tested and pose no threat to humans or the environment.
Monsanto has also drawn government scrutiny. According to a regulatory filing in March, the Justice Department was investigating whether the company engaged in anticompetitive conduct in the herbicide market. And lawyers are pressing forward with a class-action lawsuit that accuses Monsanto of conspiring with competitors to control the world's biotech seed market.
Monsanto said yesterday that it was cooperating with the Justice Department investigation. The company said it acted properly and denied that it engaged in any conspiracy to control the seed market.
Monsanto executives say they gained dominance with pioneering research and by getting some of the first products to market. "The bets we made really started in the 1980's," said Mr. Grant, the chief executive. "We really stopped on chemical R&D, and we focused on biotechnology."
Having proved that biotech traits can be profitable, Monsanto said it was moving into another phase: stacking genetically altered traits in seeds, one on top of another.
The company is also preparing to introduce consumer traits, like a biotech seed that will be fortified with omega-3, a fatty acid considered beneficial to human health.
"We're starting to populate our pipeline with consumer traits," said Robert T. Fraley, Monsanto's chief technology officer. "Now, we'll have oil, corn and canola with omega-3."
The problem is that competitors are coming out with new products that will challenge Monsanto's dominance of biotech corn and cotton. And Monsanto also faces declining profits from Roundup; its patent expired in 2000, and its price continues to drop.
"There are a lot of risks," Mr. Cash, at UBS, said. "The market is worried about competition. The market is worried about costs. The market is worried about them getting paid for their traits. They've got a big hill to climb."
Re-engineering Itself
Monsanto, the chemicals giant, has quickly become a leader in the field of genetically engineered crops, like the corn at right. Profits from its new business are expected to surpass those of Roundup, the blockbuster herbicide, this year.
Left: Worldwide acreage of biotech crops Right: Monsanto's gross profiuts, by business
Sources: Monsanto; International Service for the Acquisition of Agro-biotech Applications.
CHICAGO—Over the next three to five years, Monsanto Company (MON) will continue the steps to turn itself into a technology solutions provider for farmers and away from being a chemical company.
Hugh Grant, named chief executive Thursday, told Dow Jones Newswires that 2003 will mark the first time that the company's seeds and biotechnology operations, at the gross profit level, will surpass its traditional chemical business.
"I see our business becoming more and more anchored in seeds and traits," said Grant.
After a five-month search, Monsanto elected Grant, a 22-year veteran at the St. Louis company, to the top spot. The 45 year-old was most recently the company's chief operating officer.
The chief executive position was vacant since December, when then-CEO Hendrik Verfaillie resigned after several quarters of disappointing results. Monsanto Chairman Frank AtLee was interim chief executive.
Grant said the company had a nice improvement in its bottom line in the first quarter of 2003, when the company earned $60 million, or 23 cents a share, including charges, compared with a loss of $1.7 billion, $6.59, which included a $1.8 billion charge for goodwill impairment.
Excluding charges, earnings would have been 28 cents a share this year versus 33 cents a share in the previous year. Despite declines in Roundup herbicide and seeds sales, Monsanto's results were in the upper end of its earnings guidance.
In announcing Grant's appointment, effective immediately, the company reaffirmed its earnings guidance for 2003 of $1.25 to $1.40 per share, and its second-quarter guidance of 91 cents to $1.05. Consensus estimates compiled by Thomson First Call have the company earning $1.30 a share for the full year and 99 cents for the quarter.
Grant said the company has cut about $300 million from its selling, general and administrative costs (SG&A) and research and development since 1999.
"There is an ongoing opportunity to continue to reduce our costs as the Roundup price continues to come down," he said.
He said that by the end of 2005, he said the SG&A expenses will need to be down in the high teens as a percentage of total company sales from about 23% in 2003.
Grant was the leading internal candidate for the position, and analysts said his appointment was unlikely to cause much consternation to investors. He's a known commodity and is familiar with the company's operations and where costs can be cut.
Monsanto has two lines of business: It's agricultural productivity segment includes its Roundup herbicides and other lawn and garden herbicides businesses; and its seeds and genomics segment which provides farmers and other seed companies with certain biotechnology traits for insect protection and herbicide tolerance.
Grant says his job will be a balancing act between the need to cut costs but at the same time provide the level of research needed of a biotechnology company and sales support that is crucial to the seed business.
"We're a stand-alone agriculture business and we succeed or fail based on how we serve farmers," he said.
Grant vowed to keep R&D strong, and cost-cutting would come through improved innovations and efficiencies.
"We're a technology company," he said. "R&D is our future."
The Roundup herbicide business has become a more competitive business, and Grant said Monsanto needs to see how to do it in an increasingly cost competitive way.
In planning for the future, he said the company is assuming the dispute with various other countries over the use of genetically modified organisms (GMO) will not be solved soon.
"You can't run a technology business on a hope and a prayer that the European situation will improve in the near-term," he said. Europe and the U.S. are locked in a long-running dispute over the export of foods with GMOs.
For the U.S., Grant anticipates sowing upwards of 20 million acres with Roundup-ready corn by 2005 from the current 8 million acres. Total corn acreage is about 80 million.
In the traditional seed business, Grant said the company has seen some market-share gains in the past couple of years and he expects that to continue.
Monsanto is having a brief conference call over its Web site at 9 a.m. EDT Friday to formally introduce Grant as the new chief executive.
ST. LOUIS -- Monsanto Co. (MON) named company veteran Hugh Grant president and chief executive, ending a five-month search that began when Hendrik Verfaillie abruptly resigned after 26 years with the company.
The crop-biotechnology and herbicide company also reaffirmed its second-quarter and 2003 guidance.
In a press release Thursday, Monsanto said Grant, 45 years old, is a 22-year veteran of the company and has served as its chief operating officer for the past three years.
When Verfaillie resigned in December, Monsanto called the departure a mutual decision, but it came after the company had posted several quarters of disappointing results.
Chairman Frank AtLee served as interim president and chief executive while the company conducted a search through executive-search firm Spencer Stuart. He will remain chairman.
A Monsanto spokeswoman wasn't immediately available to say whether the company plans to replace Grant as chief operating officer.
The Monsanto spokeswoman said no decisions have been made regarding a replacement for Grant as chief operating officer.
The company said it still forecasts second-quarter earnings of 91 cents to $1.05 a share and 2003 earnings of $1.25 to $1.40 a share. The full-year guidance excludes an accounting change impact of 5 cents a share.
Wall Street expects Monsanto to earn 99 cents a share in the second quarter and $1.30 a share in 2003, according to Thomson First Call.
The company also reiterated that it expects to generate about $350 million to $400 million in free cash flow in 2003. The company anticipates cash from operating activities will range from $530 million to $560 million, with cash used in investing activities ranging from $160 million to $180 million.
Including charges, Monsanto posted year-ago second-quarter earnings of $147 million, or 56 cents a share, and 2003 earnings before an accounting adjustment of $129 million, or 49 cents a share.
The company plans to hold a conference call at 9 a.m. EDT Friday.
Monsanto's New York Stock Exchange-listed shares closed Thursday at $20.58, down 40 cents, or 1.9%, on composite volume of 1.9 million shares. Average daily volume is 1.7 million shares. The stock hit a 52-week high of $27.50 on June 10 and a 52-week low of $13.20 on July 24.
CHICAGO—Monsanto Company's (MON) decision to elevate Hugh Grant to the president and chief executive position is unlikely to cause too many ripples on Wall Street.
Analysts said Grant, a 22-year veteran of Monsanto and most recently its chief operating officer, is a known quantity who understands the economics of the company's business.
"I think people will be relatively comfortable with that," said John Roberts, analyst at Buckingham Research Group. He owns Monsanto stock, but has not bought any stock in at least three years. Buckingham does not have a banking relationship with Monsanto .
It was well known that Grant was the leading inside candidate for the job to replace Hendrik Verfaillie, who resigned in December after 26 years with the company. While the company said at the time that Verfaillie's decision to leave was mutual, it came after the company posted several quarters of disappointing results.
The question was who the company would possibly select from outside to run the St. Louis company.
Thursday, Monsanto Chairman Frank AtLee said that after a five-month search, "we were in the fortunate position of having a highly qualified candidate within the company." AtLee had been interim CEO since December, and remains chairman.
Roberts has a buy rating on the company, and said Grant's appointment "takes away some uncertainty here."
As chief operating officer, Grant will have an intimate knowledge of the company, in terms of what levers to push and where costs can be reduced if they need to be cut further, analysts said.
Grant's biggest challenge will be balancing research and development demands with the need to contain costs on its Roundup business. Furthermore, discipline will be required in order to not spend ahead of growth in the biotech side.
Meanwhile, the company reaffirmed its earnings guidance for 2003 of $1.25 to $1.40 per share, and its second-quarter guidance of 91 cents to $1.05.
The news of Grant's promotion was released after the markets had closed. Thursday, Monsanto's stock ended down 40 cents, or 1.9%, to $20.58.
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