Q3 2020 Earnings Call
Good morning.
Welcome to some WCS company third quarter fiscal year 2020, <unk> financial results.
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After todays presentation, there will be an opportunity to ask questions to ask a question you. My press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now like to turn the conference. So were two Roberts.
From what some partners go ahead.
Thank you so much operator, and thank all of you for joining us today to discuss the financial results for SW seed company for the third quarter fiscal 2020 ended March 31st 2020.
With us on the call represent a company today are Mr. watermark, Warren President and Chief Executive Officer, and Matthews Dot Chief Financial Officer.
The conclusion of today's prepared remarks, well open the call freight question and answer session.
Before beginning with prepared remarks, we submit for the record the following statement.
Statements made by the management team about W. seed company. During the course of this conference call may contain forward looking statements within the meaning of section 20, Sevena, Hey, well the Securities Act 1930, Threes amended and section 21. He wanted Securities Exchange Act of 1934th amended in such forward.
Looking statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements described future expectations plans results were strategies and our generally preceded by words, such as may future plan or planned well or should expected and dissipates draft eventually or projected.
Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances events or results to differ materially from those projected in the forward looking statements, including the rest that actual results may differ materially from those projected the forward looking statements as a result of various factors and other risks identified in the company's 10-K.
For the fiscal year ended June Thirtyth 2019, and other filings made by the company with the Securities Exchange Commission.
With that said, let me turn the call over to Mark Warner Chief Executive Officer for US in WCS Company Mark. Please proceed.
Thank you Robert and good morning, everyone on the call.
This morning, I'm going to up the bite my talk this morning into three pieces I mean, obviously, a dress Ur cobot 19, and sort of the academic world that where are you are all operating in today I'm going to a then talk a little bit about how cobot 19.
Sex some of the AG markets that were in how we sort of you those effects and lastly, obviously I'm going to focus.
Those slots.
Budgets on Aesynt W and tell you a little bit about what we're doing to deal with that and what.
We see as the near term future up the company within what we're calling a pandemic world.
So a cobot 19, obviously, it's in the news all the time they'd be more than we even want to ER here anymore.
And a in the U.S., we're opening up but the country after a flattening the curve been giving the.
Health care professionals in the country, a chance to deal with all of the sick people that.
Have caught the disease caught the virus and then you know that seems to be working but now we're in the opening up the country States.
You know first I think what needs to be said is that first and foremost SWS. The science based company. You know we use DNA techniques are in a techniques in our product development, we can build our own.
Markers genetic markers to look at different traits that were searching for was in the crops that we operate in we have big programs, obviously in our two key crops out soften sarcom.
But also programs in wheat.
And other crops like that.
So we realize that though as a science based company. We're also operating in a market of national politics, and I'm not going to go into obviously too many of the national politics in the U.S., but.
It should be said that.
You can't just be a science based company you have to think about how science, it's gonna be applied in the countries about major operations and how you're going to be successful in those mixtures of science based products and ER and political startups influences that are making decisions for the pop.
Relation of your operating countries.
So.
A little bit on on on a the virus itself. A you know you probably all heard this termed fewer herd immunity. It means that approximately 60 or 70% of the population.
It's come in contact with the Ur Cobot 19, and now have antibodies, we're gonna as that happens we're going to learn how much protection those antibodies give us the bad news would be you know maybe three to six months protection against cope with 19. The good news would be a couple two years three years or.
Longer against a cope with 19.
There's two ways to get antibodies basically you can get the disease.
And so that's what we're trying to control how many people get the disease and how quickly they get it.
We also can develop vaccine, there's basically three or four processes that are used traditionally to oh.
And then where finds vaccines you can use here you can use formylin, where you can attenuate the virus basically a weekend. It. So that you can put a life virus in the person.
And then so you get a couple of different products you get.
In activated Oh vaccines like for polio for hepatitis they throw influenza rabies.
And you can also part of the virus in these traditional methods in to the actual vaccine so that vaccines for diseases viral diseases, like hepatitis B and shingles, and human papilloma virus, all have that it's kind of the product strategy we.
We believe though that in cobot 19. These traditional methods are not going to be very.
Very successful the virus is very difficult one to use with these methods and so when you hear that there's 100 vaccines being tried and hopefully we have 10 that go through trials rapidly. These are all genetic.
Yeah. They are in a viruses and they are mainly focused on the binding sites in the spike protein that you see in all the cartoons of the hope in 19, where it's kind of.
Circular virus.
Fear with all these like mushroom like things poking out of the top.
And you know, it's pretty clear that coping 19, it's kind of a cousin of viruses that have come before there's a huge homology.
We hope at 19, and other viruses and and the binding sites.
As I mentioned that that's the are in a in DNA.
A new vaccines are are targeting.
But you know there has not been.
This is all new technology and there has not been an existing.
Vaccine made from DNA or are in a technology and so we book we are hopeful that there will be a successful vaccine, but we're also trying to plan for a situation where that actually maybe off in the future or may in fact never call.
There are viral diseases, where a vaccine has been worked on for many many years and and there has been no success on finding a vaccine and the biggest examples there as the AIDS fires we've been working on that for 15 20 years and there's still no vaccine.
So.
We're thinking of a world really where.
Cobot 19, this pandemic that we're all in.
Hopefully, there's a vaccine, but the but the you know sort of worst case is that the virus.
It is in the market now we continue to.
Control it at different levels in different countries around the world. The world population gets exposed to it ER and and different percentages in different countries. A book of the population of those countries GITR antibodies, because they've actually had the seats.
But to get to the 60 or 70% population. We think are exposed to the hope at 19, we think that it's going to take a couple more rounds. Unfortunately of infection, but for a vaccine is available. So we're sort of saying in our assumptions a vaccine is.
Available in the summer of 2022.
And maybe the hope at 19 comes back in the fall 2021 and in the spring of 2022. So we're planning for a situation where next planting season in the northern hemisphere.
And the spring crops winter crops in the southern Hemisphere excuse me.
You have to deal with Cobot 19 were upgrading SW with that assumption hopefully that's not going to be the case, hopefully there'll be a vaccine sooner there may be a miracle and you know cobot 19 sort of disappears like some other viruses, but I don't think weekend bent on that as a strategy.
But you know we are operating S. W. As if we have to deal through another major market sales season with cobot 19 in the background and it's affecting you know everything that we do and I'll get into some of that here in a few minutes.
Well that's enough about viruses I'm not a virologist. So you know this is a common man sort of description of Oh.
You know what pandemic world are based on covert 19, but.
I've been around.
Biotech and plants DNA are in a for since since it was invented in plants in the early eighties.
And you know have a lot of pharma friends and so my view of Ur Cobot 19, and its potential different effects on our world you know really come from that history of Oh.
Association with our land DNA technologies.
So the AG markets.
Yes, the second piece of my presentation today. So the AG markets are a we believe going to be in some turmoil.
There's a lot of reasons for that first I should say you know you've heard me three years ago. When I came on a CEO talk about getting closer to the farmer.
I think we're doing that a you know we purchased pass through genetics in Australia and in the U.S. You know we've spent a lot of additional money built in large sales and marketing team.
Building the pharma dealer network that we purchased.
Purchase problem with Gen and building, our distributor network and getting information through social media out to all of our customers spend a lot of money doing that.
But I I should the backup a step, though and just say to you.
When we look at AG markets, we look at we want to have a very balanced position around the world. So if you look at the Big AG producer countries. So these these are countries that have the soil and weather and water to produce large amounts of agricultural commodities.
And they have relatively small populations so that they can they don't consume all.
They have a huge surplus that they can.
Sell ship to other countries around the world with big populations that can't provide old all the relevant food.
So when we think about those countries obviously, the big producers are the U.S.
Canada, Brazil, Argentina, Australia, but these are the countries that have huge surpluses of animal products are grains and proteins and oilseeds.
And you know, we see up and coming areas like the Ukraine in some parts of Russia.
Sure.
Sunflower and some ups, but we are varieties and things like that.
Our ground in those areas. So those are the focus places, where we want to be to sell see because that's where most of the farmers that are being successful around the world bar.
And a lot of these markets are you now have a lot have different crops like I, just mentioned sunflower and weak but.
The world markets are mainly driven by corn and soybean they are incredibly productive crops in the grains and carbohydrates, that's corn and soybeans in oil and they drive the economics of the farmers. So what I mean by that is the farmers, saying his or her.
Self pay or how much can I make in my market, whether it's the U.S., Canada, Brazil, Argentina, Australia, how much can I make on corn and soybeans for the most sports.
And what can I or else can I plan to give myself, some diversity and how much per acre I am I going to make that crop sold in our case, alfalfa and sorghum versus corn and soybeans.
So that's the economic yardstick that essence, w. cells against because we don't sell corn and soybean.
We sell the crops that compete in some of the markets with corn and soybeans like sorghum and alfalfa.
And compete for the acres and so we're always measuring our economics against those crops.
We are in a situation in the U.S., which is a major driver both those perhaps where we're gonna plant a lot of acres in 2020, and we're having pretty good weather so the planting a timeline.
That farmers or how fast they can plant.
Crops, it's pretty good this year, we're actually planting faster than the five year average.
Or in the U.S.
So we're probably that means we're probably going to have pretty good yields. If we have good weather during the season and we don't have an early frost. So we're going to have a lot of product and in that background, a lot of commodity corn and soybeans and in that background, we have an ethanol industry, which consumes 40% to 45% of all the corn in the U.S.
It's produced every year.
That is about 30% to 35% shut down because of low gasoline prices. So you know ethanol as a proxy for gasoline.
Or on a per price per gallon and when gasoline low price ethanol has to match that it actually has lower amount of energy per pound per gallon, then gasoline and so you know ethanols ethanol industry shut down about a third of its production.
<unk>.
We also have you know this unknown, what's going to happen with the trade wars between China, and ER and the U.S. and so you know right now we have fairly low commodity prices our expectation that we're gonna have a very very tough year in terms of farmer profitability in 2020.
And where they're trying to.
Operator, I said w. with that expectation.
So we're trying to.
Tell our farmer customers you know this is what do we think you can make on soybeans. This is what we think you can make on corn on a per acre basis. This is what you can make on sorghum or alfalfa.
The depending on which part of the country or enough. It's obviously the more northern customers in the U.S. and Oh, sorry comes to the more western corn belt.
So for SW, the third part of my.
Discussion here today, it really means that we're trying to figure out how we balance our production across the northern and southern hemisphere. So it's more now than reaching out to farmers more directly closing the distance between us and them in terms of information.
Not having too many.
People between us and the farmers. So we don't like to step distribution, we like either a distributor of farmer dealer.
Between us and our eventual farmer customers, who actually it's planting the seeds on his rented or own acres.
So.
You know the acquisition now focusing on SW a bit the acquisition of pastor genetics is balancing our sales picture you know, we basically have approximately half our sales in the international Division and we have about half our sales in the Americas deficient.
And so that's kind of a good thing it allows us to have.
Some more flexibility we think it it's a it gives us I think some protection against the trade war going bad between the U.S. in Canada as hopefully, we'll still be able to have Australian companies sell agricultural commodities and need to.
China and the rest of Asia.
And it allows us to begin to sophistic up more sophisticated process to manage our business right. So we are having the opportunity every year at the plant in the spring in the northern hemisphere of the U.S.
So that's alfalfa and sorghum right now our two main crops and we're trying to match that have off season production at low production cost per pound up seed also in Australia, and we're pushing our too that would be for alfalfa, mainly and we're pushing our two jvs in South Africa for.
Sure.
So in a couple of years, you're going to hear us more talk about.
A balanced approach a balance worldwide approach to production and marketing our sales are split equally approximately between our two divisions and our production that's gonna be sort of northern southern hemisphere. So that we get to chances every year and having production in alfalfa.
At reasonable costs.
So this geographic balance I think.
It's very useful in in a company like ours trying to operate in this pandemic world.
So we're very happy to welcome pasture genetics into the family of companies that make up Essen W. Rob Damon and his the founder and his family or have been doing a great job for us we really.
Enjoy working with them and they have a great reputation in the Australian market I should take a little bit of time here and just say I was in Australia in the month of March for about 10 days had a chance to meet all of the new pass the genetics employees and welcome them.
SW at a couple of functions that we had for everybody had a chance to me, Rob and spend some time with him and his son or daughter.
Just talking about the business and where we would going.
And that was a hugely beneficial for me and hopefully for them just to get to know a little bit about what they were really doing and where our opportunities bar and have them here for me.
You know sort of the strategic view of what the company was trying to do so that was a great great trip, Thanks, Rob and your family for hosting all of the essence W. people at at the these functions and Ah Thanks to David California, All his people for organizing the whole thing.
As I said I had quite a bit of time and Australia on purpose and got them also meet with our other regional managers around the world for Europe and for the Middle East and <unk> Asia.
And for Africa, and so that was really useful to because I you know we're building all these markets.
Obviously, we're not doing production into many of those markets yet, but we are building sales and all those markets and it was great to spend some time with all of our people to understand what exactly is that we're doing.
So.
It was a great trip I managed to get back on Friday, the 13th and escape by I think a week shutdown of all the international air fares coming or air flights coming from.
Asia back to the U.S., but unfortunately now we know cobot 19 landed before I did and infected at least L.A. and then or.
Washington, and Oregon, a bit and then came back to New York got through Europe, and so here we sit today. So obviously, a very very tragic situation in terms of all the people who died.
Because of.
It's really.
Dangerous virus.
So when I say a company that can operate in a pandemic world you know, sometimes you get lucky and these things and you know lucky.
Yes.
Based on.
No. Good planning, it's always a good thing to happen. So we had spent a maybe I had mentioned in previous calls about the budget. This year in 2020, we spent a couple of million Bucks on I T upgrades on better computers or on a security for our.
Information, but we also we're one of the few customers before the pandemic that were.
Both a voice and data customer up zoo.
And so.
That's where the lucky part comes in.
You know, we made that commitment before Pat the pandemic hit and we have been able to operate our facilities.
I'm home in a lot of cases, obviously, there are people who can't do that so in our plants. The people who organized our seed for next year's research planning our plant breeders.
People, who clean of all our seed in our six production plants three in Australia and three in the U.S.
They have to go to work every day and you know we were concerned about their health, but you know we've been pretty careful to encourage people to social distance a use masks, we sort of organized restrooms and you know.
ER break rooms, and stuff like that so that.
Sort of people to people contact would be Minimalized, then you know the Australians I've done a great job controlling as a country covert 19, so they have less than 100 deaths in the whole.
Our strong Ya.
And so that has not been a worry but the U.S. certainly was a concern given all the a infected cases there are in the U.S., but we are Fortunately have only had one opened 19 case it ER and it was in our research facility down in Texas in our sorghum research business.
This which is super Super obviously important to us, but we sent the person home. This was now about a month ago and and they had a fairly mild case and they did not.
Pass on cope with 19 to any of our other plays and so we've only had one case.
And in all our hundred sort of 75 people.
The you know I've been using zoom to communicate with the with all of our people. It is a fantastic tool. We just had a call. So all the Americas. Please last week and a few weeks ago, a month ago, we had a call with all of our 175 employees around the world and it's just the and we can.
Take questions.
On line and stuff and it was just.
Fantastic communication tool just to.
Give everybody a you know some background and what SWS doing and how we were performing in the market and what our worrisome concerns were and I think everybody.
That's certainly I appreciate it and I think everybody appreciate it.
Not being able to have that communication.
So you know we were off to a <unk> very very good start this year or you're going to hear from that next and you know our third quarter January through March was excellent corridor.
But then covert 19 hit us and you know sort of April.
Well, it's pretty tough may and June are tougher and when I mean by tougher is you know we are still concerned about.
Problems with the supply chain.
You're obviously seeing on the news, although some of these supply chain problems with agriculture.
Just because the the either produce or potatoes are onions, or whatever tomatoes.
Well in in Florida, California, Idaho have a tough time, making a tamarkin and people are waiting in a.
Just its food assistance and so you know getting those products to people is obviously a difficult task and <unk>.
We're slowly figuring out how to do that but we were we were also and we are also still concerned about getting our seat to our farmers basically filling the order book that we had.
We're not sure whether.
We were more worried at the beginning of this process, but we're continually worried about a truck drivers getting ur cobot, 19, and adding capacity of distribution not being there when we need it.
That's you all know the third quarter's big quarter for Us that's going to talk about that but the fourth quarter is always our biggest.
So ah well in that now and I. Unfortunately.
I have to say you know, it's not totally clear how the fourth quarter spend it turned out we're working hard at it.
Because the covert 19 were not going to provide a any revenue guidance for the quarter. We don't really do that anyway, but you know it's Ah. We were it was unfortunate because we have as you'll hear from that have very good third quarter and fourth quarter were working hard to make sure that turns out okay, but we're really.
Still not sure with half quarter over.
So that's what my comments.
Our today I want to talk a little bit about.
Cobot 19, and its effects and what our expectation should be you know in our case, we are believing that we have to go through not just this year, but the 2021 selling season under sort of pressure from from this terrible virus and the you know we're we're making.
Obviously plans to do that but clearly when you can't call on some.
Potential customer face to face and this is one of the problems, we're having now not just the.
Supply chain, but you know are.
People don't want to see us in our and we don't want our people to travel on planes.
You know our people are traveling in cars remember, we reorganized our sales force to put them closer to our customers. So most of our customers are within car distance, but people are leery of having a face to face, meaning ER and the you know it is definitely affecting our ability to convert leads to actual.
Sales orders, so we're just going to wait and see what happens in the fourth quarter. Because this is a new situation for everyone and.
You know.
We just have sort of see so.
We're planning that our next spring selling season. In addition to the 2021 2020 season is gonna be under a a cloud of cobot 19 are still being in the environment.
We hope that there's a vaccine in numbers that we can trade treat the millions of people who are going to need it.
And we can build this herd immunity, but we are planning for the worse and worse that we have to go through the spring selling season in 21.
With this hanging over everybody's had in agriculture, and obviously ours are also.
With that I will Oh, and my comments for the call Snake and turn the whole discussion over now to Matt.
Give you the financial details that please.
Thank you Mark and thanks to everyone joining us on the call today.
Let me add that are I hope everyone on this call and their families are safe and healthy during its very unique an unfortunate time.
Now if I start jumping into the results core revenue, which excludes revenue to pioneer was 17.9 million for the third quarter, an increase of 74% compared to 10.3 million <unk> third quarter the prior year.
As mentioned in the press release, we recognized 5.5 million revenue from our partial period contribution from passion genetics, which we acquired on February 24th of this year.
Ashley genetics will be included in core revenue going forward now if you exclude pasture genetics, rather now core revenue for Q3 was up 20% versus the third quarter the prior year.
For the first nine months of the current year core revenue and that's including pasture genetics, that's up 40% versus the prior year.
And if we exclude pasture genetics partial period contribution core revenue for the first nine months and still up 18% versus the prior year.
Total revenue, which includes revenue to pioneer was 29.1 million for the third quarter compared to 18.2 million for the prior year and for the nine month period total revenue was 53.7 million versus 62.9 million in the prior year.
As a reminder, we entered into a termination agreement and thoughtful license agreement with pioneer in May of last year.
Good day pioneers paid its 40, well I never paid its 45 million in May of 2019, as well at 16.8 million over the last couple quarters, and we are entitled to receive an additional 8.4 million over the next nine months.
At a high level I can say that we were tracking strongly during the third quarter. However, as cobot 19 hit and continues to play out we have less villeta visibility towards the fourth quarter will look like.
And as a reminder, our fourth quarter is the height of our key selling seasons in both the U.S. and Australian domestic markets.
Given the uncertainty we believe it it's prudent to temporarily suspend our read our previous 2020 revenue guidance.
One area, we do have further visibility on it that we see a shift of approximately 4 million of revenue decline year that we previously expected to be recognized in the current here and this is not going to shift into fiscal 2021.
Gross profit margins were 22.1% for the third quarter compared to 26.3% for the third quarter the prior year.
The decrease was primarily due to the change in sales mix and inventory write down in charge of approximately 600000 and certain low margin sales to clear access dormant alfalfa seed.
Our operating expenses for Q3 increased approximately 1 million from the second quarter of the <unk> turn here and this is largely due to the inclusion of patch genetics for a portion of the quarter as well as additional spend that R&D level.
This is in line with this is inline with our expectations as previously mentioned over the last several quarters. We've made several investments in sales and marketing and product adult functions.
Given the current environment and we've implemented a hiring freeze and we're going to of course continue to closely manage our expenses.
Now we discuss the during our last call, but I would like to clarify our operating expenses, including Passur genetics.
We project full year fiscal 2020 operating expenses as follows.
Asked you need as she needs to be approximately 21 million in fiscal 2020, which includes pasture genetics for the stub period as well as stock based compensation.
R&D to be approximately 7.5 million and 2020, including Passur genetics.
And depreciation and amortization expense will be approximately 5 million.
At the EBITDA level, we had a loss of 900000 for the quarter compared to a loss of 1.2 million in the third quarter the prior year.
As we leverage our infrastructure and drive growth in core revenue. Our goal continues to be to drive towards positive EBITDA contribution over the coming year.
Now moving to the balance sheet I just wanted to point out that we continue to make progress in reducing our inventory levels and freeing up working capital and as I mentioned over the last two quarters, we planted very minimal acres about south of production as we continue to walk through these existing inventory levels.
Well when you look at our inventory levels from March 2020 versus March 2019, our balances are down nearly 17 million or 19% and this is even after taking into account the increase in inventory from the pasture genetics acquisition, which was nearly 6 million at the end of March.
This decrease in inventory as a reflection of our ongoing efforts to continue to reduce alfalfa balances and can perkins inventory to cash in the coming quarters.
We certainly have more work ahead of us, but we are on track and we've made significant progress to reduce our balances to more optimal levels.
So to summarize we are executing on the various initiatives we set out.
We're also very excited about our recent acquisition and how well the integration is going.
Well, we are concerned to continue to focus on the challenges presented by coal that 19, including the potential disruptions to logistics foreign currency fluctuations and the Barents stay at home measures. We are hopeful that the impact some challenges can be resolved quickly that the progress we've achieved over the last couple of quarters number or as I should say well continue at the.
Fiscal 21 at beyond.
So with that I'll turn the call back over to Mark.
Thank you Matt.
Just a couple of comments a in summary here.
We were having a really great year, we were very convinced that our strategy of.
Focusing on a more crops than just alfalfa, but maintaining alfalfa as went up our main focus crops was what's working our trait development is coming along and a you know we expect this herbicide trait in absorb them to be very very.
Good for the market and lucrative for SW in the next a short term a few years.
And you know it was oh unfortunate that covert 19 sort of a landed on U.S. shores, but we're fighting hard to convert interest in our products the firm orders and shipments of actual seed and as Matt mentioned.
You know so far.
We are doing okay with our shipments both the foreign countries and foreign imports and in the U.S. to U.S. customers, but.
There are clearly.
This allocations in the Didnt trucking.
And and this then the shipping industries overseas and we're having to work very very hard to get containers and trucks and get the proceed on time to our many customers all around the world.
So.
You know the fourth quarter's a battle and you'll hear obviously.
How that battle turned down on our next call and as Matt said, our thanks to all of our employees.
For their.
Handling of covet 19, both mentally not being able to sometimes work.
In the same office working from home taking care of their kids.
And it's still paying attention to our business were Oh, we're always going to be thankful for the effort they put in and ER and as Matt said, we hope all of you are on the call and your families are healthy and that you're making it through this.
New pandemic world the.
With.
As much eases as possible so good health to everybody and I'll turn the call back to the operator, and we'll be happy to take questions.
We will now begin the question and answer session to ask a question Jim My Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before passing the keys to withdraw your question Press Star then too.
This time, we were positive momentarily to assemble a roster.
Our first question if some sarkouhi so Brad can surveying Chen from B. Riley go ahead.
Hey, good morning, and thanks for taking my question here.
You guys you know clearly mentioned a the logistics impact here you know any kind of color you can provide on the order book year over year.
And also you know are you shipping product today.
Yeah. So you know I I'd say, that's our case.
In general the order book is even stronger than the third quarter results.
And we're you know trying to.
Make sure that we have an early assessment of when the customer actually wants his or her seed or because it does take a lot more effort and a lot more lead time to arrange a container put it on a ship get it overseas through a port not too many foreign imports are closed a few but.
We've been able to work around that and then the U.S. we opened up.
Distribution center in the mid West this year, and so weve stock that and so that makes it a little bit easier for us to sort of within a 24 hour 48 hour timeframe make sure that we can get seed or.
To our pharma customers in the U.S. either directly from our plants are from that new.
Mid West distribution center.
So things are going Okay, you know and hopefully it's things open up here.
You know the the scenario. We're afraid of is that a you know we've really kind of opened up a in my mind at least a bit too soon in there and the case load is not the disease cases are you know rising steel in many states.
And and our worry is that you know it is gonna have some short term effects on trucking and stuff like that and a and that's going to affect us, but so far.
With some good planning and much harder work and longer lead times by two or three or four weeks. You know we've managed to stay ahead of that problem.
Got it and I know you know you essentially not provided guidance. This time around but we did have you know I'm a little bit of commentary on how things are going on that last call, which was you know towards the late end of February I guess, you know any.
You know any help on on where you may have land in relation to that guide relative to your core sales.
Matt do you want to answer that.
Sure I'm, sorry, Keith as we communicated in our press release, our core revenues year to date are up approximately 20% year over year.
And the previous revenue guidance that we provided back in February I believe with a range of core revenue growth of maybe 9% to 16% so year to date, we're on track of.
Being ahead of that on a core revenue standpoint, and as Mark said the order book is.
Feeling strong for Q4, but we've just got the logistical uncertainty as to where sales are going exactly fall. So we'll know a lot more here next four to six weeks.
Understood. So assuming that this pattern continues you know you don't let's say ship it. It here in this quarter. You know is there a chance you ship it maybe with a little bit of it the delay or deferral.
Yeah, I think that's probably hopefully the worst outcome is that it ends up and or the 2021 year for us because it missed the push they did a june.
And that's always a problem for us as you know start keys I mean, we've we've within the company talked about maybe having a different fiscal year a little bit later, but you know because our businesses worldwide now it's just not a good data were discussed it with the date that historically, we've had and you know some sales always Ah.
Leak over into the next fiscal year, ER and you know that may happen this year it in a bigger.
Number, but just because it covered 90.
Got it and you know kind of going to the gross margin level here in a talk a little bit about the sales mix change had an inventory write down and it seems like you sold some some excess feed 'em for maybe a lower margins than typical can you maybe.
Bifurcate you know like.
Where the Delta would have been if if you didn't have an inventory write down in it didn't sell the.
Excess seat for a lower price.
Yeah, I'll make one comment and then turn it over to Matt I mean, you know seat as a has a shelf life as everyone knows on the call and so we're always managing you know that shelf life or against the market movements. We did so some alfalfa seed.
That was getting a bit older the tooth at a price so that we could move it but I'll, let Matt to answer your question specifically.
Yeah, Sorry case, we did take inventory write down and in Q3 as he mentioned in her remarks that write down excluding the effects of that write down our margins would have been closer to 24% for the quarter.
And I guess as a reminder, just.
One way or the the fourth quarter is a quarter, where we should be Ics, we are fully expecting the margin profile to improve versus the previous quarters. This year and that's really based on sales met such as a reminder, Q4 is our it's a quarter or are we have our highest concentration of sorghum sales and no silicon sales carries the highest by far the highest.
Margin profile on her business so margins in Q4, even with the uncertainty that we're dealing with with Covance 19, one I'm fairly confident in saying that we'll see it nice improvement in margins in Q4.
Thanks, I'll hop back into queue ceding before for others.
Our next question from Ben Klieve.
Oh from National Securities Corporation.
Got that are all right. Thanks for taking my questions. Just a couple of quick one for me I'm Mark you commented that towards the end of your prepared remarks on the R&D portfolio and that the herbicide resistance sorghum.
On it but I'm wondering if you can elaborate a bit more on kind of the status of that of that product in the context of the cover 19 era are there delays that you're expecting either you know a field trials or a you know where the launch of commercialization I you know what we're really how to how did the current era, a you know impact that that products specifically.
Yeah. So you know there were definitely some operational problems caused by not being able to fly because of coping 19. So you know we were.
Obviously and are very excited about herbicide resistance and sorghum, they see ace and so.
We did do a winner production and ER or down in the Caribbean and we were supposed to you know we had people down there for planting and you know there's this thing you have to match. The Nick you know you have to plant. Your mail line. So they have Paul and when the female.
Line is ready to receive it and that's the only way to get seat. Obviously, so we had people down there to do that and then we were supposed to have our own people down there to harvest [laughter], which was which is almost finished now.
And Ah you know they couldn't go because they had to be in 14 day.
Huh.
You know.
Away from anybody else and so.
We had a very.
You know well supervise local crew, but we did not haven't aesynt w. person on site. So we don't think any problems arose from that and to see will be coming back by airplane.
To our Texas facility for cleaning here, shortly and will be putting that out in trials. So at this point you know there was a few more difficult steps, but but no nothing that would knock us off a bar timeline expectation for introduce introduction of that trade as you know we're moving down the line.
And with our partner a adama.
Who is our chemical partner and you know working through just how and what the best education process is to are now joint farmer customers.
And so all that seems to be going according to plan and the you know you never know how good the product is gonna be till you see it in trial that trials for our farmers, but also for us.
And the you know well be getting that planted in the spring on schedule and hopefully we'll have a good results here. After we see a the season over in September October.
So on schedule.
That's about okay.
Got it that's how.
It is I guess as a follow up to that I mean, it sounds like there's obviously some logistical challenges, but arisen on you know with with the crop it but do you do you anticipate being able to provide.
You know more detail around the progress of of this crop and as that you know as the Caribbean harvest gets a you'll get to analyze this the summer or do you think I do think kinda updates on the you know on the commercialization timeline are gonna be you know not.
Not able to really be provided until maybe your Q4 call in September.
Yeah, I think September probably be the best time to do it you know, there's a lot always going on but.
You know, it's a it's a it's a slow timeline for product development takes many many years and yeah. We'll have some seed for early sales and 22 ish, but and we'll have to do another off season production cycle, but.
Yeah.
The real question is seeing what the the herbicide resistance, where it looks like in the field in large numbers and what kind of yields we get for putting you know.
Hybrids that have the trade versus hybrids that don't have the trade. So we always plant that was kind of trials to measure against standard lines without the trade. So that's really the big question is how.
Will oh the herbicide was this is really hold up in mothers natures mother Nature's conditions, you know in the field and large large acres and that's that's what's the purpose of these trials are the 2020.
One is to have a.
A real view of that excuse me 2020. This year, it's I get my years mixed up and I did make that mistaken the call. So its 2020 calendar year 2021, that's MW fiscal year. So that's this planting season.
Got it okay.
Okay.
Very good what I think that doesn't for me I'll get back in queue best of luck navigating here the balance of the fiscal year and ER. Thanks, a lot there.
Thank you appreciate your current thoughts.
[laughter] question Press Star then one.
Our next question, if some Gerry Sweeney from Roth capital.
Go ahead.
Hey, good morning, Matt and Mark Thanks for taking my call.
Good morning, Gerry Willinger.
A couple of different questions maybe.
On on different parts of the field, but.
I wanted to talk about maybe the international markets. Obviously in years past Alfalfa had some issues you know with Saudi Arabia and things like that.
This does this cove it situation change that market.
Huh.
For some of the demand and planning alfalfa.
What are your baby or change any demand positively or negatively across the board.
Yeah, I think that's a great question I think it's a little too early to give you an answer to that I mean are in the short run it probably doesn't change everything very much.
Ah you know the Saudis are still.
Got a water ban on to use water for large acres of alfalfa production in country, but the off out the Saudi customers prefer fresh milk I don't like a long shelf life now as the Europeans drink or.
Dry powdered milk you know they like fresh milk so [laughter].
I don't think in the short run that demand curve, it's been a change much and so I wouldn't expect covert 19.
Has too much effect.
In the longer term you know the government of Saudi has a financial issue with a low oil prices and you know.
What you read is that they need to.
[noise] low $70 oil price to breakeven.
Cash flow wise in their economy to be able to afford all the subsidy programs that they have for Saudi citizens and obviously, we're nowhere near that price what that means in the longer term for <unk> consumer demand for fresh milk and therefore alfalfa in the region.
It's a good question, but I I really don't have a view of what the answer to that question might be.
So there are no longer term affects but in the short term in the next year or two that won't be there won't be much.
Okay got it and then.
Lastly, [laughter] supply chain, there's a more friction right longer lead time little bit more I forgot.
You did give us a little bit of a few into margins into the fourth quarter, but.
<unk>.
Does that friction impact margins to any degree in the fourth quarter or you know going forward.
Yeah, I'll make one comment and then turn it over to Matt for the actual statement on margin expectation, but.
[laughter] you know world trade is different right.
You're you're going to see a lot more production in the U.S. Oh, you know the sort of global economy, where the cheapest mask or the cheapest Oh bag of see you know what's the what's the goal is not going to be the goal for all products now because.
As we all realize that there is almost like an insurance payments that needs to be made so that you can make masks in the U.S. and so if that NASS cost to 15 cents in China, you might be willing to pay 20 cents in the U.S. just to have.
Your own social supply, that's under your own control and and the public we'll see higher prices, but I think the public's willing to accept that so.
It's gonna be some changes like that and because of that you know there used to be a lot of containers that came from China with products cell phones, and other things to the U.S.
The trade deficit was in China's favor and those containers would pile up on the West Coast then.
From our five points plant in from our Idaho plants, a lot of times, it was pretty cheap and easy to get containers going back to Asia.
That is more difficult now and our business is change too right as I said in my remarks, we're doing more.
Seed.
Shipments directly from Australia to some of those customers and so now we don't.
Need containers cheap containers piles up on the west coast of U.S. and factor of no value to us. So things are changing and you know it's a it's our job to keep up with those changes and try to stay ahead of them a little bit.
And you know match our business to the best economics of how the World order of trade as a is changing and and Matt I'll. Let you answer the question on on margin for Jerry.
Yeah, I mean sure it's really I mean, given the uncertainty of this pandemic. It really is hard to put a exact set of a fence post around the impact to margins, but I will say in the short term. We're we're still feeling good based on our sales mix that Q4 is a higher concentration of sorghum sales.
It's carry a much higher margin profile and then more broadly speaking as we look to next year as the global excess supply of Alfalfa seed continues to work with its way through and our inventory balances come much more in line with optimal levels, we shouldn't be seen improvements in margins there and.
Sure periods, coupled with the fact that sort of them should represent a larger portion of our business in the future.
Tom So at this stage, we're not seeing discounting.
Due to cold bid, but certainly that could change at any time.
Speaking of inventory.
I'm not sure if you have broken it out or can or desire to but.
How much of the inventory is alfalfa and what would be the sort of ideal carrying amount.
<unk>.
Good day to day.
Yeah. So curious so we ended the March quarter, with just over 70 million and inventory of that amount.
56 million with alfalfa.
And I think that as we look at that $56 million of alfalfa that will come down probably another $10 million just in Q4 alone.
And as we look to what our inventory balances will most likely be 12 15 months from now sort of in June of next year, those alfalfa balances will be down another $20 million approximately.
Based on our rough estimates of projected demand and and what we know its place from a production standpoint. So we are we've made a lot of progress we've got a long way to go but there's a pretty clear path for needs.
Probably $20 million.
Huh.
Moving off the back at moving out of inventory and into our operating cash flows here or Atlas.
That's a big chunk of change that's that's great, though so okay guys I appreciate it thanks for all the detail.
You're welcome.
At this time, we have no more questions. This concludes the question and answer session I would now like to turn the Caf The conference back over to Mark long for closing remarks.
Thank you operator and Ah. Thanks for all of you are on the call today, obviously, a it's a difficult operating environment with covert 19, but we are expecting good results for the fourth quarter and our third quarter results you know in our view, we're very very strong.
So I'll just ended with wishing everyone. Good health good fortune take care of yourselves take care of your families.
Take care of all your co workers and we'll.
Look forward to giving you an update.
Really on our most important call of the year, which is our fourth quarter call. We'll we'll go through our 2020 <unk> financial results and talk to you a little bit about the next three years and what are the future looks like going forward because that's what when we do our three year budgeting cycle also so thanks again, everybody look forward to talking.
The next call Bye bye.
The conference has now concluded. Thank you for a time then two wells presentation you may now disconnect.