07 September 1992 00:00 [Source: ICIS news]
The sale by Monsanto of its process control subsidiary, Fisher Controls, fits closely with its strategy to concentrate on those businesses in which it believes it has the capacity to develop a profitable long term future. Fisher Controls has been highly successful and is well regarded in the chemical industry, which is one of its major customers. However, Monsanto's future clearly lies with its agriculture, chemicals, pharmaceuticals and food businesses and it has not found itself able to provide Fisher with the level of investment necessary for growth.
The electronic and electrical equipment manufacturer, Emerson Electric, has agreed to purchase Fisher Controls for $1275 million and the transaction is expected to be completed soon. Monsanto has not decided yet how the proceeds of the sale will be allocated; they may be used to fund investment or an acquisition. Observers believe, however, that it is more than likely that the company will repurchase shares as it aims for the goal of a return on equity of 20%.
Return on equity in 1990 was 13.6%, having fallen from 17.6% in 1989, and slumped last year to 7.6% as substantial costs were incurred restructuring the chemical operations. Excluding the $325 million after tax restructuring charge in 1991 the return would have been 15% and it is thought that the 20% target date is 1994. Financial analysts, such as Mr James Wilbur of Smith Barney, have suggested that the net return this year will be 13.8% and that a return of 15.8% can be expected for 1993 assuming that $970 million in cash is received from the sale of Fisher Controls and 16 million shares of stock are repurchased.
While such financial management will go a long way towards helping Monsanto achieve its target there is concern over the performance of large parts of the company's operations which may make achievement of the desired result increasingly difficult. Monsanto's first half performance, which is shown in some detail in the table on page 4 of this issue, masks the $487 million charge taken against chemicals in 1991 and the poorer performance in all areas at the operating level.
The situation is certainly very different from the heady days of 1989. The recession has taken its toll across the board but particularly in the chemicals area and in Fisher Controls. The chemical businesses, such as plastics, resins, rubber and process chemicals and fibres, are tied closely to vulnerable large industrial and consumer end-user markets such as automobiles and are the most cyclical in the company's portfolio. Monsanto will, without doubt, be eyeing their continued performance and prospects carefully.
Operating profits in chemicals in the first half of the year were $151 million, 21 % lower than in the similar period of 1991 if restructuring charges taken in the second quarter of that year are excluded. There was some improvement in performance in the USA during the second quarter and if restructuring charges and the costs of settling a law suit are discounted then profits fell by 3% over this three month period. The overall performance, however, was marred by weaker results from Western Europe and the former Soviet Union.
Agricultural chemicals provide the largest proportion of Monsanto's income and performance here has been related closely to the multi-purpose herbicide, Roundup. The herbicide has accounted for as much as 60% of agricultural sales but patent protection was lost last year in both the USA and Europe and the result has been a steep fall in price as generic substitutes have been introduced.
Monsanto believes, however, that it can continue to defend its competitive and cost position through its manufacturing process patents and expects reductions in the selling price of Roundup type herbicides to boost demand still further. There are also a significant number of chemicals in the research pipeline and products such as the crabgrass herbicide Dimension and weed control agents based on a new pyridine class of chemistry are in the early stages of commercialisation.
Reform of the European Community's Common Agricultural Policy could cut agrochemicals demand in the region by as much as 15% over the next three years but Monsanto believes firmly that it can counter the effects and remain strong by speeding the movement of products to market. The company continues to take the long term view throughout its operations, a strategy that is creating a wide range of products which should supply future profits.
Biotechnology is a case in point. Investment in biotechnology has been close to $1000 million although there is little, as yet, to show for this high level of expenditure. In the agricultural area, however, research in plant science could lead to the commercialisation in the middle of this decade of crops resistant to insects. Varieties resistant to viruses are also in the research pipeline as are types of herbicide resistant soybean, canola and cotton.
Perhaps the most publicised of Monsanto's efforts in biotechnology is the growth hormone bovine somatotropin, or BST, which can be used to boost milk production in dairy cattle. Expenditure on this product could well be in the region of $250 million and while its use has been approved in eight countries, it has yet to gain acceptance in the USA which is its largest potential market. The long running debate which surrounds the use of BST and indeed the need for it will continue but Monsanto is apparently determined to maintain the capability to secure regulatory approval and launch the product.
Markets for low-calorie and low fat products are becoming increasingly competitive and Monsanto is faced with declining margins in this area also. Operating profits for the Nutrasweet Company were 9% lower in the first half, following the trend of the 12 months to December 1991. The artificial sweetener, Nutrasweet, comes off-patent this year and, as with Roundup, selling prices will decline over time in the face of competition from generic aspartame products.
The company will be relying over the next 2 years on Nutrasweet's strong brand identity and the advantages it has in manufacturing technology, over the next two years but will benefit in 1993 and beyond from a lower annual amortization expense of $130 million following expiration of the aspartame use patent. By the middle of this decade, it also hopes to be filing for regulatory approval of a novel sweetener, called Sweetener 2000, which should be able to replace sugar in all of its uses by consumers and commerce.
A similar picture is painted at the pharmaceuticals subsidiary, G D Searle, where patent protection for the Calan range of drugs used to treat hypertension and angina has been lost this year. Calan accounted for almost 30% of pharmaceuticals turnover in 1991 but falling sales have already begun to have an impact on profits. Searle reported an operating loss of $39 million in the second quarter but this had much to do with the costs of introducing in the USA an anti-infective agent and strengthening the US sales force to anticipate new product launches.
Having been particularly successful in the late 1980s, Monsanto is facing a period of reduced profitability that could well persist for some time. In pharmaceuticals it can be expected to search for alliances to help defray the cost of product launches and it will be looking very closely at its chemical operations to ensure that they retain the potential for earnings growth. It is easy, perhaps, to concentrate on the negatives without giving due attention to more positive trends but Monsanto is not alone in this troubled period for the chemical industry in having to examine even more closely its fundamental business strategy and in which areas the future really lies.
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