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Analyst presentations -- Merrill Lynch conference
and Monsanto meeting
Robert B. Hoffman
March 14, 1996
Draft: March 12, 1996 -- 2:00 p.m.
Thank you, Doug, and good afternoon.
(Or: Thank you, Nick, and good afternoon.)
By almost any measure, 1995 was an outstanding year for
Monsanto. From a financial perspective, we reached record
earnings and surpassed our 20 percent return on equity target for
the second consecutive year. From an operational perspective, we
continued to cut costs, reduce headcount and redesign our work.
And from a growth perspective, we began to bring our
biotechnology research into the marketplace and formed some
strategic partnerships to do so. We challenged our people to
find new ways to grow globally -- but with
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discipline -- and they're responding remarkably to that goal.
The market has rewarded us handsomely, with the stock price
jumping 74 percent, and our total return to shareowners outpacing
the S&P 500 by three-to-one.
But our stock isn't above 130 today because of what we did
in 1995. There is tremendous anticipation built into the stock
price for what we plan for the next few years.
So the question before Monsanto's management is how do we
raise the bar: How do we create a new level of shareowner value,
and how do we provide the motivation and incentives for our
employees to do so?
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We took the first step at 8:00 a.m. Eastern Standard Time
today. We announced this morning that we will be aggressively
repurchasing shares again. At the time we acquired Kelco, we
said that we would reconsider share repurchases once our debt
levels were again in an acceptable range for the rating agencies.
We're there, and we believe Monsanto's stock is a great value
even at today's prices. We have existing board authorization for
more than eight million shares, so I want to re-emphasize that we
will be aggressive in our repurchase program.
The second step involves some items that are noted in our
proxy. The proxy and annual report are being issued today. You
can access them electronically through Monsanto's home page on
the Internet if you'd rather not depend on the U.S. mail.
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In the proxy, we're explaining two efforts that will more
tightly tie compensation to shareowner value. Under the adage of
people pay attention to what gets rewarded, we're planning a
stock option grant for employees who don't currently receive
options.
It's not that our people aren't already interested in the
stock. But we want to do more to give our people, across the
board, an economic stake in our shareowners' success. As we
implement a new financial metric -- which I'll discuss in a
minute -- the tie between our employees and Monsanto's
shareowners will become even more direct.
The other compensation issue that we're presenting to our
shareowners is a complete revamping of our
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incentive program for senior management. At the core of this
program are premium-priced stock options.
I know all of you are familiar with conventional options
which are exercised at the price of the stock on the day the
options were granted. These options tend to reward attendance,
not performance.
Monsanto had already moved away somewhat from such
conventional options. The options we have in place today vest
only if we attain our longstanding financial goal of 20 percent
ROE. This was a positive, evolutionary step at the time, but we
feel that today it doesn't have the tight connection to our
shareowners' interests that we want.
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The premium-priced options we're proposing may be exercised
only if the stock meets or exceeds specific price targets within
specific timeframes. They can only be exercised at or above the
target stock price.
The result is that the stock has to actually exceed the
price targets before senior management can realize any
appreciation on these options. To give you an idea of the
stretch involved, these are the prices that have to be reached
before the executive can do anything with the options: 150, 175,
200 and 225. And eighty percent of the options are weighted to
the 175, 200 and 225 exercise prices.
The other change we're proposing to management compensation
encourages our executives to purchase a
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very substantial amount of Monsanto stock using full-recourse loans
financed by the company. The maximum incentives are triggered only
if the total return to Monsanto's shareowners through the year 2000
is at or above the total return at the 75th percentile of the S&P
Industrials. And the top incentives can't exceed the amount that
will be repaid under the loan agreement.
When the manager takes out this loan, he or she is putting a
significant sum of personal money on the line alongside the
substantial investment shareowners have made in Monsanto. I
don't need to tell any investor that this means our executives
will be subject -- as they should be -- to both the upward
opportunity and the downward risk inherent in stock ownership.
The expectation, of course, is that they'll be driven to make
decisions that
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create an upward trend.
The third step we're announcing in our proxy has to be
viewed in the context of the changes we're making in our
compensation. Let me explain. We're asking this year for the
authorization of additional shares -- to a total of 850 million.
Any shareowner worth his salt would take a hard look at this.
We're asking for this authorization for two reasons. One,
it will give us the flexibility we need to react quickly to
opportunities -- but strategic opportunities -- that create
economic value. Two, it permits us to give careful consideration
to a stock split in the range of four-for-one to five-for-one.
We expect to take such a proposal to our board next month.
Admittedly, stock splits can't
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statistically be linked to increased shareowner value. However,
there's a body of opinion that suggests a split will have
psychological value for employee shareowners and some segments of
the market.
But if you're concerned that greater authorization might
lead to a frenzy of undisciplined acquisitions, keep in mind the
compensation targets I just discussed. Management is now being
paid on the same basis as our shareowners -- on growth in per
share value. That's part of the discipline that makes the
request for additional authorized shares a rational one.
But the greater discipline -- and the one that makes me
comfortable with the authorization request -- is our fourth step
to raise the bar on shareowner value. I've
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alluded to it with many of you, but we announced it officially
today. In 1996, we will be putting in place a new system of
financial metrics that features Economic Value Added -- supported
by Total Business Return/Cash Flow Return on Investment at the
planning level.
I've mentioned our decade-long goal of sustaining a 20
percent ROE. When it was implemented in 1986, it was a major
stretch goal for a company delivering ROE in the low teens. It
also imposed a discipline that forced us to divest
underperforming businesses. It subsequently led to the portfolio
of businesses that has contributed to our recent success. And
shareowners were rewarded at a 16 percent compound rate of return
during the last decade.
But most of the value already has been extracted
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from an ROE-based target. We wanted to find a financial metric
that would create new levels of shareowner value and would be more
directly correlated with the stock price. It had to be a measure
that was economic-based and tied to cash flow, rather than one
that is accounting based. It had to drive decisions so that
shareowner wealth is continually enhanced over time. A system of
EVA and TBR/CFROI fit that bill.
EVA is well known and understood by investors. For
Monsanto, it's appealing features are that it's easy to
understand, it can be used by all employees, and it can be tied
to incentive compensation. EVA can truly drive the type of
behavior needed to create shareowner value.
As you know, EVA is linked to market targets through
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MVA, or Market Value Added. But as we worked with Stern Stewart on
our financial metric, we became convinced that we would need to
augment EVA to create tighter ties among our long-range plans,
financial and stock price goals, and EVA goals. We, therefore,
decided to couple EVA with TBR/CFROI to create a system of
metrics.
TBR/CFROI is a sophisticated, investor-oriented planning
tool that measures a company's return to its shareowners over
time. TBR/CFROI can be used to better understand the performance
expectations reflected in our stock price. These expectations
can then be translated into EVA targets for Monsanto and our
business units.
The power of combining these two metrics is that we
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now have at our disposal the best available techniques to
understand investor expectations. We can set business targets for
achieving or exceeding these expectations. We can then translate
these goals into actions that can be easily understood and
implemented throughout our operations.
There are four types of value drivers in this new
measurement system to increase shareowner value -- four steps
shareowners can immediately identify with and track:
The first is a focus on operational excellence.
Substantial and ongoing cost reductions, redesign efforts
and productivity improvements are the bread-and-butter of an
EVA system.
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The second -- and perhaps most important -- is a zero
tolerance for underperforming capital. Capital -- whether a
business or a facility -- that's not meeting our new
criteria has to be either restructured or divested.
Third, growth has to add value. Alliances, joint
ventures and acquisitions only are acceptable if the risk-
adjusted return is greater than the cost of capital. This
means that if the net present value is not positive, we
don't do it. Internal R&D faces the same scrutiny.
Fourth, we can enhance EVA by lowering or optimizing
the company's weighted cost of capital. This means using
the appropriate amount of debt in
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our capital structure. And we can increase EVA by reducing our
cost of capital, by reducing our beta, by providing more
predictable and sustainable financial performance -- in other
words, by reducing the perceived risk associated with being a
Monsanto shareowner.
EVA imposes a discipline that makes our share repurchase
program, our compensation plans and our share authorization
proposal feasible. EVA and TBR/CFROI will force us to create the
value drivers that cause the stock price to rise.
This year, we'll be determining the targets for increasing
shareowner value during our planning process. We'll also be
integrating EVA into our incentive
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compensation plans. By the start of 1997, we'll begin measuring
our performance against the EVA targets.
None of these actions, of course, are a substitute for
superb business performance. And superb is what we expect. The
potential for Roundup herbicide remains strong, and the product
has room to grow on the prospects for conservation tillage alone.
Couple that with the opportunity for additional growth from
increased Roundup use with our new Roundup Ready crops, and you
have significant potential for a 25-year-old product.
The payback for years of patient investment in Roundup Ready
crops and the other products of biotechnology is finally here.
Hendrik Verfaillie, who oversees our agricultural businesses, is
fond of saying -- as
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you may have noticed in the New York Times -- that biotechnology
has always been an exciting technology -- but that it was expensive
excitement. He points out that we're now turning this to earnings
excitement.
We're also seeing some renewed excitement for our
pharmaceuticals with strong earnings growth last year from Daypro
and Arthrotec arthritis treatments and Ambien, our treatment for
short-term insomnia. Just two weeks ago, the FDA approved
Covera-HS, a unique form of calcium channel blocker that will
revive this franchise for us. We're hopeful that Arthrotec will
be our next drug to get FDA approval, and our pipeline is looking
more promising. We're also working on a second licensing
agreement -- similar to the one we arranged with Sankyo last year
- -- to share the costs of developing and
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bringing one of our pipeline products to market.
Just as important, Searle's new management is fully
committed to cutting costs. Marketing and administrative
expenses as a percent of sales have dropped 8 percent in the last
two years, and Searle's not done yet. We asked Bruce Sents, whom
many of you knew as Monsanto's controller, to return to Searle as
CFO so that we have someone there who will help make sure that
the cost reductions get made.
Our Kelco acquisition is on-track. We recently combined
Kelco with our NutraSweet ingredient business and our phosphate-
based food ingredients. We expect this combination to reduce
costs, to give us a more powerful presence in the food industry,
and to create a
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platform for earnings growth. Our expectations for our consumer
food products -- notably Equal and other tabletop sweeteners -- are
also larger than in the past.
Our chemicals businesses remain sound, but, as you know, the
global economy and end-use demand in housing and automotive
markets have been soft in the first quarter. Continued cost
reduction remains key here. Cost reductions are also critical to
our Protiva animal health business, and to Solaris, our lawn-and-
garden business. Solaris has changed its distribution system,
and some of the operating income from the latter part of 1995 was
deferred into 1996 because of this switch.
Without outstanding business performance, share repurchases,
compensation programs and financial
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metrics are meaningless. But when you combine these changes with
the type of performance you saw in 1995 and expect in 1996, they
will drive us toward aggressive goals -- and results -- that will
ratchet up the rewards to our shareowners.
Other companies have instituted compensation programs
similar to the ones we're proposing. But others have typically
done so when their stock was at an historical low. It's
extremely unusual to see this type of compensation move made when
the market is hitting record highs, when interest rates are low,
when the company's stock is at an all-time high, and when so much
anticipation is already built into the stock price.
We're proposing these changes because this is not
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the Monsanto of the 1980s. We note on the cover of the annual report
that some perceive us as a "lumbering, 94-year-old chemical
maker." The investor who has supported Monsanto in the last year
knows we are anything but.
We are also anything but done with creating increased
shareowner value. The changes I've discussed today -- new
compensation plans and new financial metrics -- are going to
force decisions about our existing businesses that we otherwise
might not have been inclined to make. These changes also will
force some prudent risk taking -- and that will help create the
culture we need at Monsanto to continue to reward our
shareowners.
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As Bob Shapiro notes in his chairman's letter in the new
annual report, "Gaps between perception and reality are where
investment opportunities are born." We think we're creating some
investment excitement that we hope you'll participate in.
Thank you.
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If asked: Internet home page address is:
http://www.monsanto.com
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IMMEDIATELY Scarlett Lee Foster
(314) 694-2883
MONSANTO RESUMES SHARE
PURCHASES; ANNOUNCES NEW
COMPENSATION PROGRAMS AND OTHER
CHANGES TO ENHANCE SHAREOWNER
VALUE
ST. LOUIS, March 14, 1996 -- Monsanto Company is
resuming its share purchase program, proposing to alter
its compensation programs, requesting authorization for
additional shares, and changing its financial metric, all
designed to reach a new level of shareowner value creation.
"By all measures, 1995 was an outstanding year for
Monsanto," Chairman and Chief Executive Officer Robert B.
Shapiro said. "We want to build on that momentum. We're
taking several steps to provide the motivation and
incentives to generate sustained, superb performance that
will benefit our shareowners."
Monsanto will resume its stock purchase program
promptly as the first step in this effort. The company will
actively purchase shares, up to an existing authorization of
more than eight million shares.
Second, the company is changing its incentive programs
to more tightly tie compensation to shareowner value. These
programs are described in the company's 1996 proxy, which
was filed with the Securities and Exchange Commission.
A stock option grant for approximately 27,000 employees
who don't currently receive options is being planned. "We
want to give a much larger group of our people a direct
economic stake in our shareowners' success," Shapiro said.
-oOo-
031496
St. Louis
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The compensation program for senior management also has
been revamped. One element involves premium-priced stock
options that can be exercised only if Monsanto's stock meets
or exceeds specific price targets within limited times. The
price targets are tentatively set at $150, $175, $200 and
$225, with 80 percent of the options weighted to the latter
three option prices.
"For our management to gain from these options, the
stock has to exceed the price targets," Shapiro explained.
"This plan contrasts dramatically with conventional stock
options, which are typically exercised at the price of the
stock on the day the options were granted."
The other change to senior management's compensation
encourages Monsanto executives to purchase a substantial
amount of stock using full-recourse loans financed by the
company. This plan offers senior management financial
incentives based two-thirds on long-term stock price
performance and one-third on retention. The total
incentives cannot exceed the amount to be repaid under the
loan agreement. None of the performance portion of the
incentive will be paid unless the total return to Monsanto's
shareowners through the year 2000 is at or above the total
return at the 50th percentile of the Standard & Poor's
Industrials. The maximum incentive is triggered only if
Monsanto's total return tops the 75th percentile of the S&P
Industrials.
"Under most option-based incentive plans, executives
share in the rewards of stock ownership, but not the risks,"
Shapiro noted. "When a Monsanto executive participates in
this loan program, she or he is putting a significant sum of
personal money on the line alongside the substantial
investment shareowners have made. Our management will be
subject to both the upward opportunities and the downward
risks inherent in stock ownership."
The third change announced today involves a request for
shareowners to authorize a total of 850 million common
shares. There are currently 200 million shares authorized,
and approximately 118 million shares outstanding. The
authorization is being requested to give Monsanto the
flexibility to react quickly to opportunities that will
benefit shareowners. The approval of additional shares also
would permit the company to consider a stock split in the
range of four-for-one to five-for-one.
Finally, Monsanto is adopting Economic Value Added
(EVA) as a key component of its new performance measurement
system. "We wanted to implement a new financial performance
measure that would be more directly linked with stock price
and shareowner value creation," Shapiro said. "It had to be
a measure that was economic-based and tied to cash flow. It
had to drive decisions so that shareowner wealth is
continually enhanced over time. The EVA-based system we've
devised meets that test."
-oOo-
031496
St. Louis
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Monsanto's new financial measure is discussed further
in its 1995 annual report to shareowners, which also was
released today. The annual report is available in printed
form, as well as on the Internet. To connect to Monsanto's
world wide web page, browser software should be set
to:<http://www.monsanto.com>. A data supplement containing
historical financial information is also posted on the home
page and is available on disk.
Note to editors: EVA is a trademark of Stern Stewart & Co.
-oOo-
031496
St. Louis
