Q1 2021 S&W Seed Co Earnings Call
Ended September Thirtyth 2020 with.
With us on the call representing the company today are Mr., Mark Wallace, President Chief Executive Officer, Mr., Matthew Dodds Chief Financial Officer.
At the conclusion of today's prepared remarks, we will open the call for a question and answer session.
Before we begin with prepared remarks. Please note that statements made by the management team about Wi.
Seed company during the course of this conference call may contain forward looking statements within the meaning of section 27, eight the security back to 933 as amended and section 21 E of the Securities Exchange Act of 934 as amended.
Such forward looking statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements describe future expectations plans results or strategies and are generally preceded by words, such as may future plan or planned will or should expected anticipates a 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 risks that actual results may differ materially from those projected in the forward looking statements as a result of various risk factors and other risks identified.
<unk> and the company's 10-K for the fiscal year ended June Thirtyth 2020.
Other filings made by the company with the Securities and Exchange Commission.
That said, let me turn the call over to Mark long, Chief Executive Officer, Russ W. seed company Mark.
Thank you very much Robert and welcome everyone today to the call.
I'd like to divide my comments into two distinct pieces that I'll talk a little bit about the first quarter, obviously with the reminder to everyone that the first and second quarters are too low sales volume quarters, just because of the normal.
Normal flow of AG business in the northern Hemisphere, Southern Hemisphere markets that we participate in and the third and fourth quarter are the other large quarters.
For us so that's going to give you some detail I just want to remind everybody that you.
Our our guidance that we gave on our last call for the year.
2021 was 80 894 million.
Total sales, including ourselves to pioneer.
Then our core business.
Between 73, and 79 million that's.
That's the 22% to 32%.
Increase over 2020.
We are.
On schedule build to make those sales numbers and we feel comfortable that while they are aggressive that we have the ability and the inventory to complete those sales but markets are are you.
Giving us some favorable win.
In the U.S., we have improving commodity prices.
In corn, soybeans, and cotton, because mainly of purchases coming out of China commodity purchases coming out of China for U.S. produce materials.
And those are uplifting sorghum prices and prices that are affecting us in a positive way.
Right, we have some very good news continuing we not only got the reins of glass.
Corridor, but rain.
During the spring planting season and.
Protein prices for B and cheap are very high and Australia. So farmers are very excited so it looks like a good planting season there.
No I just want to say that we're very optimistic that we can meet our very high growth rate for the 2021 fiscal year.
A little bit more about that so I've been asked the question by and.
Investors why can't you guys grow at 25%.
Per year, when the rest of the markets sort of about 2% a year and I I just wanted to give you all a few comments as to what we really sort of do that allows that those high growth rate.
And you know these comments are kinda, but a summary of <unk> point.
Points I've made in the past, but I just wanted to sort of hide them all together for everybody. So there's basically three reasons that I see where our high growth rates versus other companies in the industry. One is that we're expanding into new geographic markets that we were not in before and that is always a positive thing.
I'm for yourselves.
When you've got new customers in new geographic markets.
Secondly, we have.
Expanding our product line as I've said before and basically for all bar products, alfalfa, sorghum, sunflower and our pasture crops, where we are able to sell those to the same distributors in many of our markets that we have had historically for the Uh huh.
Free up the company and so yeah, we have expanding sales because but the same list of customers. We have an expanding product line and we get more sales from them.
For those new products. So we have an existing relationship and we offer them a new products.
Well on our behalf.
It's a little bit different in our other two crops BB, obviously has a special distribution and production.
Them outside of our four other main crops and we are.
It's mainly a crop that we deal with in Australia, and we participate in the endpoint wealthy system remember we purchased the Dow We program in Australia, and we're very positive on that but you don't really sell we see to distributors the market distribution network is a little bit differently.
In Australia.
We did the big market worldwide, we don't participate in other weak markets.
In in the U.S., or Canada, or Europe, where we'd it's also a big crop, but in Australia. We are focused on we and the endpoint wealthy system.
The third thing we do is in the markets that we've been in historically and it's about 40 markets worldwide 40 different countries.
We do look for new distributors and new distribution, so depending on the market that might be barber dealers as it is in the U.S., where we're trying to build a barman dealer network, both the numbers quality apartment dealers and information that we provide.
Provide to them a boat or online.
And in printed materials.
We are always looking for better distribution.
Through distributors that it's easier to do frankly as you have more products to sell the bigger distributors are more interested in you had the seed company.
When we're selling alfalfa sorghum sunflower in the pastor crops.
And you know we are willing to with big distributors provide a private label relationship where they may have a philosophy of selling.
Eat in their own branded they're looking for I see company to partner with them in a private label business Sobi. We do do that so those are really the three main reasons why our sales I think are growing faster than the industry norm.
Again, you know they are expanding into geographic markets number one number.
Number two selling existing distributors more.
Sales through our expanded crop offerings about Papa sorghum sunflower in the past your crops and three looking for new distributors in those markets that we have always sold them, where we know the markets, but we look for expanded distribution or expanded farmer dealer networks.
I just want to say too, though you know.
Sometimes when you expand that these high rates and these are really strong growth rate I must reiterate Ford seed companies.
There are things that we watch right. So we watch receivables and new customers because we got a significant number of new customers. We watch our inventory levels, because we have to grow and produce inventory aggressively to have inventory available for these kind of sale gains.
Remember that the seed business, it's not where like a software business, where you can just print out more.
Information products, you know, we only get one crop season in the northern hemisphere in the southern Hemisphere, we plant in the spring and harvest in the fall and each of those and so there is a big effort on our part to always match Oh projection up sales to the inventories that were producing.
And I should say that you know kind of one of the key factors in all of this is our management.
He.
I, obviously have been in the business for 40 years.
I pretty much sold every kind of crop species that there is.
I built three companies and so those two are now the big four that dominate the seed biotech business, but we also have an experienced management team both in the U.S.
And in Australia, the two countries that we manage our business out and these men.
Men and women are experienced in the industry. They also have taken products to market develop new products.
They have experienced the patient that's required to use plant breeding to produce new products and they have also introduced genes into the market or.
For other companies that they were employed wet so they understand what it takes to put a technology into the marketplace.
So that's a little bit that I wanted to talk about why our sales gains are so big and why they are big versus other seed companies in the industry and how you can.
Feel assured that our management team is capable of.
Managing and dealing with that high growth and the balance sheet issues that are accompanied by it but.
But you know we are not just interested at the company in.
Additional C bagged up seats sold we believe that technology is really important and you know we spend a lot of time developing technology, we have talked before about the three products that are in our portfolio of products.
Right now.
And I'll go through those quickly for everybody. There's double team sorghum, we called that D.T.S. its double team because it's STW partnered with Adama, we put out press releases on that because in.
Product like herbicide resistance, you have to have a seed company in our case it develop the trade and you also have to have a partner that the AG Chem company. So.
So we believe that these products will install them will be very beneficial to farmers in that plant sorghum seed and want to control a grass weeds that they have.
And our second product or we call I came away improved quality alfalfa or we just had a press release that we put out that we are now moving that product forward also calix, our technology partner, who developed the technology has also put out.
The press release.
And we have our third product during free sorghum, Darren is a naturally occurring toxin in sorghum and we have licensed material from a land Grant University AG land Grant University in the U.S. and we are moving that product.
<unk> also so when you look at technology, we have a wide Ah interesting technology, some like D.T.S., we developed ourselves.
I'm like I came away, we partnered with other technology companies that are specialists and DNA.
Manipulation.
Some are very traditional products like darn three sorghum, where we actually licensed.
Germplasm on an exclusive basis from a land grant University in the U.S.
So these products are all non GMO, we will only sell non GMO products, all our product pipeline will be non GML. The the double team sorghum and the improved quality alfalfa.
We'll be introducing in the market. This year 2021, so the spring sort of April may of this year, we'll be selling our first small amounts of seed.
And the during three sorghum.
We're targeting for the first introductions in a few years around 2023.
Again, we are working on the deck to describe our technology pipeline.
And a you know a it will not surprise people that it will look something like what other companies have shown before in terms of the value to a farmer.
And how we do evaluation of a these take different technologies to determine whether they're beneficial to the farmer and whether they solve a particular problem that the farmer has.
From from the standpoint of I'm going to market you know, we believe that the trade that we are.
Velobind have high value to farmers and so we will pursue a broad licensing strategy, we will license our technology to other companies in the seed industry our competitors in many cases.
And in most cases actually because we want companies to be our partner who have market share in sorghum alfalfa at the crops that we have traits for currently and we want them to sell.
Sell the technology because they also believe that the technology has value to farmers. So we will have a broad licensing strategy, we will license to others in the industry and obviously, we will put our traits into every bag of C that we have in sorghum, alfalfa or as we introduce that into the market.
So that's kind of what I wanted to say both on the sales side and on the technology side.
Obviously these are longer term.
Projects that we have and we are now focused on a near term projects and sales it's important to us to make our numbers every year I do want to announce that we have in our quest to be more efficient goods.
We should see it it's always important to any seat company on the production side and I think we've made I made comments before that we're always interested in new relationships with new companies and I'm pleased to announce that we have established a working relationship.
With a company in the Biofuels industry, and we will be working with them.
On a different species and the ones that were currently in two allow them to use.
The the materials for making Biofuels and so it will give us the ability to be more efficient production plants have higher plant utilization and obviously to spread our existing cost over a wider base of crop production.
So.
That's an.
Excellent sort of example of how we try to gain efficiency and at the same time, you know focusing on.
The short term year quarter to quarter sort of improvements, while keeping our eyes on a the two bigger areas that I focused on today, which are number one.
Continuing to grow our sales at above industry growth.
Growth rates and to adding technology to the sales that we currently have to be able to offer improved products to the farmer and obviously better margins. The essence W. So with that I will end my comments today and I'll turn the discussion over to Matt.
<unk>, our CFO, who will give you some details on our financial performance in the first quarter Matt. Please.
Thank you Mark and thanks to everyone joining us on the call today.
So now I'm going to jump into the results core revenue, which excludes revenue to pioneer was 12.2 million for the first quarter, an increase of 36% compared to 9 million in the first quarter of the prior year. So keep in mind. This is on top of the core revenue growth of 59% we posted during 2020.
As we mentioned in the press release, we recognized 2.6 million of revenue during the first quarter from Patrick Genetics, which we enquired, which we acquired in February 2022.
Total revenue, which includes revenue to pioneer was 13.9 million for the first quarter compared to 12.3 million in the first quarter of the prior year.
So as we look to the remainder of the year.
We reiterate our previously issued guidance from September and as Mark mentioned, we continue to expect core revenue to be within a range of 73 to 75 million for fiscal 21 Rep.
Representing estimated core revenue growth within a range of 22% to 32%. This.
This rapid growth is expected to come primarily from our two key end markets, the U.S. and Australia.
And also consistent with our guidance from September we expect total revenue, which includes contributions from pioneer can be within a range of 88 to 94 million.
Now moving to gross margins adjusted gross margins, which excludes the impact of inventory write downs were 19.4% in the first quarter compared to adjusted gross margins of 27.9% in the first quarter of the prior year. The decrease in gross margins for the quarter was primarily driven by strategic lower margin alfalfa.
Sales into certain regions to gain market share and also targeted lower margin sales to clear some certain excess inventory balances.
As we noted in the press release, we did record an inventory write down charge of 900000 during the quarter.
Now we are expecting gross margins in fiscal 21 to show meaningful improvement over 2020, we're projecting gross margins to be in the 23% to 24% range and this improvement is expected to come primarily from growth in our higher margin silicon products.
Improvements in alfalfa margins, given that our long inventories situation now improved as well as the launch of our hybrid sunflower program and our endpoint well teach from wheat in Australia.
Our adjusted operating expenses for the first quarter of 2021 were 8.1 million compared to 7.1 million and 2020. The increase can be attributed to additional expenses from the acquisition of pasture genetics and of course, the additional investments in sales and marketing and research development functions that we've been talking about.
Now we discussed it during the last call, but I wouldn't like to clarify our guidance for operating expenses, including pasture genetics for the year.
So we project full year fiscal 2021 operating expenses as far as follows excuse me.
As she need to be approximately 21.5 million, which excludes noncash stock based compensation research and development to be approximately 8 million and depreciation and amortization to be approximately 6 million for the year.
At the adjusted EBITDA line, we had negative EBITDA of 4.6 million for the first quarter compared to negative EBITDA of 2.7 million in the prior year now the first quarter of 2021 was impacted by timing shift of product revenues to pioneer coupled with some purposeful investment in the sales and marketing and R&D functions.
Now based on improved seasonality throughout the remainder of the year, which does absolutely included trends towards higher margin products. We believe you will see significant improvements in adjusted EBITDA in the quarters to come.
As we leverage our infrastructure and deliver core revenue growth. Our goal continues to be driving towards positive EBITDA contribution in the coming periods.
Now I'm going to quickly just move to the balance sheet and we've talked about this in prior calls, but we continue to make progress in reducing our inventory levels and freeing up working capital when we look at our inventory levels from September of 2020 versus September of 2019, our balances are down nearly 10% and that's even after taking into account the income.
He said and Ive inventory from the passion genetics acquisition and I'd also like to stress that our alfalfa inventory balances have decreased approximately 17 million or 27% over last 12 months and were expecting this trend to continue throughout the remainder of this.
Fiscal year. So this is a reflection of our ongoing efforts to continue to reduce alfalfa inventory balances and convert this the cash we've got more work ahead of us, but we're on track and we've made significant progress to date.
So to summarize we're continuing to execute against our plan Q1 will be the low point in the year in terms of financial performance as it represents our seasonally lower volume and lower margin business. This will act as a pivot as two well for the remainder of the year, which will look like improvements in core revenue stronger gross margin.
Wins and further leveraging of our infrastructure.
So with that I'm going to turn the call back over to Mark.
Thanks, very much Matt and thanks, everybody for being on the call here today I just want to conclude by.
Thank you everybody for their interest in essence W. We really believe that are above industry growth rates and sales can be maintained and we're also very very excited as we get into new traits and we have 2021 is our first year of introducing trait.
Two trades, we've been working on now for many many years.
That we're going to have improved production improved products for farmers and we're going to have improved profits through innovation fluorescent W. So thanks, so much everyone for being on the call today and.
Thank you for your interest.
Interest in us and W. Well by now.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
As a reminder, this event is being recorded at this time, we will pause momentarily to assemble our roster.
Our first question comes from Sarkis Sherbetchyan with B. Riley. Please go ahead.
Hey, good morning, and thanks for taking my question here.
You're welcome Sarkies, yes.
Yeah. So just wanted to touch real quickly on on the gross margin I think you know clear that you've been.
You know getting.
Rid of some of the alfalfa inventory, especially the lower margin product just wanted to get a sense for where we are in that point on on your balance sheet and your sales cycle and then also if you can maybe comment on you know that the improved margin expectations going forward. I think you mentioned the product mix is shifting and also you you might have meant.
And the hybrid sunflower launch in an endpoint royalties in Australia, maybe if you can just kind of give some flavor on that.
Sure Matt.
Matt can.
Take the first half of your question, which is getting into some of the specifics about.
$900000 a write off this quarter.
In terms of the your general questions about the other crops.
Oh, you know.
One of the reasons, we added the the crops that we now have.
I mentioned in my comments, you know alfalfa, sorghum, sunflower and pasture crops be the ones that we're really selling through distribution. So this is the efficiency that our sales guys get from making a call, but now having having more species to sell to the same customer you know frankly, one of the reasons to move.
Out of Alfalfa is that it is a fairly low margin crop in terms of if you took a portfolio of all the crops that see companies. So it would be towards the bottom of the list.
There's lots of reasons for that that mainly all comes down to how much the genetics that a seed company can present and sell to a farmer how much yield the farmer can get from that and in alfalfa, obviously, because its perennial crop and so the yield.
[noise] benefit must be spread over five or six years that in between when the farmer recedes.
In some markets like in the U.S. a in the dairy markets.
So you know, we basically have to take what we would charge a farm rent spread that over.
Five years.
Sorghum, and sunflower or hybrid crops that are planted every year Astra crops up some of the same.
Issues of as alfalfa, but they're new crops for us and and high growth rate crops for us as a as indicated by you know how well pastor genetic switch now we call Essen WCS, we transferred all branding over to SW, but the essence w. pasture crops.
That previously were passer genetics are doing very well this year.
So product mix for sure sort comes almost got twice the.
Margin that alpha has sunflowers in between the two of them.
So hopefully that answers your question and.
You know, we're we're optimistic about the endpoint royalties in wheat that was another part of your second part of your question our people in Australia, just say that after all these years of drought with the with the drought breaking rains.
And then the continued range this spring.
Crops look incredibly good and especially the wheat crop in some places as it's twice the yield per acre that is sort of the average yield for Australia, so who's going to be a lot of wheat in the market and that if it's all sold will translate to a lot of endpoint wealthy so we're optimistic.
Input Rockies standpoint, Matt.
Do you want to try to answer.
The first part of Sarkies his question.
Sure, Yes, sorry, okay. So with respect to the alfalfa inventories we then.
Discussing the past several quarters as you're aware, we've made significant progress in reducing the long inventory position, particularly in non dormant alfalfa and as we work through this long position, we are selling some higher cost inventory on our balance sheet, which was produced several years ago or overly you know certainly not in the current production here because we've shut the spigot off but.
So we anticipate continued efforts on reducing this inventory but.
But but not really carrying the same margin drag as we experienced in Q1, which I'll be it was a very low volume quarter for us or the the margin drag that we experienced last year, we probably have.
Roughly $15 million worth of inventory, that's higher cost that's going to be thinner margins and as that sell through over the next 12 months.
That will have some level of a drag on the margins, but again, the the margin guidance, we'd get enough, 23% to 24% for the year takes that dynamic into consideration.
Does that answer your question Sarkies.
Yeah, that's super helpful and I think that that's kind of what I was getting too was if you have factored that into your assumptions for this coming year and then the guidance Youve given us for the margin structure I guess, if we kind of start to look out and you've worked through the inventory.
Especially regarding alfalfa and the mix is starting to shift to higher margin products right does that mean that the level of margin improvement for the following fiscal year should be meaningfully higher than the guidance that you've given for this fiscal year.
Yes, absolutely. So yeah pardon me Scott, Matt can comment, but you know it'll be higher meaningful I don't know what meaningful means you are beautiful beach dust, but it will be higher.
Got it thanks, and one more for me and I'll hop back in the queue, Mark you've you've talked about some of the benefits.
In the U.S. regarding commodity prices right and obviously trying to get buying some of the U.S. materials I just want to also pick your brain about your positioning in Australia, and what that means for potential buying activity from China.
With regards to your Australia position just want to get a sense for you know whether you see favorable tailwinds as well in that market and how you see yourself positioned there. Thank you yeah. So.
In the U.S., we're kind of really in the middle market in terms of size of seed company in Australia, whereby it knows may be the biggest integrated see company so were pretty important there.
The.
The general Australian market is.
Excellent I mean.
The rains have.
Really given farmers huge yields that some people have never even ever seen before in their lifetime of farming I mean, it's it's a one time maybe in a.
And farmers career that you see yields like this.
And protein demand seems very high so you.
You know protein in terms of Ah sheep.
And be mainly chicken is a less important crop.
Animal crop race in Australia, those prices are pretty good you know some a lot of beef and then and cheap.
To a lesser extent can be sold on the open. So live cattle were actually sent a different places in southeast Asia and stuff.
But you know in general are slaughtered.
Carcasses are sent out also and prices are very good so.
You know we're optimistic that the.
Agricultural economy in Australia is very very positive entered Kerry.
It should well ship should rise in that in that.
Tied.
Thanks, I'll hop back in the queue.
Next what excuse me. The next question is from Ben Klieve with National Securities. Please go ahead.
All right. Thanks for taking my questions on first a kind of a to piggyback off of the conversation you had already on the endpoint for LTC.
Business, Australia can.
Can you help help me understand kind of what the timing really is up revenue recognition here I mean do you get do you get a benefit.
Benefit of of this market until the final product is sold it does it happen that you know upon harvest once you don't want to go to processors.
I'm wondering.
What exactly do you really see this business.
Sure.
When do we see our revenue I think is your specific question, but let me just give you a little bit of a feel for the industry in total and why we were so I'm bullish on getting into the weak business in Australia and why we are not in the weak business in other places. So we is a is a difficult crop.
Let's see companies to make money on.
European CE companies do okay.
It's very difficult in Canada in the U.S., even though there's huge acreage as you know Uh huh.
To make.
A good return in the in the week business, where you know farmers are flying on their seed from an airplane and you know a winter wheat to you know haz waste your problem issues in America, and Canada, and so if you get goods knows if.
If you if you get a decent production of little plants, you know usually when its no two weeks about two inches high.
You know you can get a good crop if you don't get early moisture in the wheat is too small.
When it Snows then you know you might not get the yields later on in sort of a July August when we this harvested most of North America. So it's just a difficult crop, but in Australia. The system that the government has put in place for encouraging seed companies to breed.
Better wheat, and barley and canola Theyre all included in the endpoint royalty system you basically in wheat, you know we released the improved varieties, they're not hybrid several varieties and farmers, we introduce those to farmers who have tried out the material.
There are lots of different regional growing area. It's in Australia, It's a giant cotton <unk>. So you have to focus in on which of those regional markets you want to address.
And then we are made.
Basically sell the seed once to the first farmer he grows the Si and and continues to sell that to other farmers in his area or people who are interested in our particular variety because we presented in the Australian national trials and <unk>.
That's how the weakness multiplied in volume in the market with no expense to us each time, a farmer multiplies, though he must accompany with that seed purchase. He certificate that is part of the Australian regulation that says who see he's actually.
<unk> has grown and and who owns the genetics of that crop. When eventually the the seat is going to be sold to a end use customer and most of the wheat in Australia, a the highest quality wheat, which is the market that were breeding for.
It's sold in Asia to noodle companies. So it is not a bread, we like the U.S. hard read winter wheat market. It is not a white soft wheat market like in the U.S. for cookies or.
Some of the European we tend to be wait weeks.
It is haas, the you know noodle market.
For Asia, and so when that week gets to the port and has purchased by a company that is going to use it to make noodles.
Then the endpoint royalty kicks in and that's when we get paid so it can be several years. After the introduction before you start to see the first money and then obviously if the variety performs well both in the farmer's field and as.
Weak that can be made into Ah Ah you know high quality noodle. That's when you see the big endpoint royalty payments because it's a certain it varies by each variety, but its a certain sense per bushel up production that is use that to me make the noodles.
So it is delayed by a few years and it is difficult sometimes for us to know how much we it's going to be sold because we don't really even know how much inventory. There is in the market and we don't know of that inventory how much of that is going to be sold so you know it.
Difficult forecast to for our guys to put together.
No not trying to got it bad yeah, well, yeah, I mean, well I appreciate that and I mean candidly <unk> you talked about this multiple times a you know over the last year or whatever since on you know since that acquisition was made and I think it's probably going to take me at least two or three years to actually understand that that process I'm sorry.
[laughter] I appreciate that the you know all all of the details there, but I'm I'm just not smart enough to capture every element of the.
Yeah, but yeah, we'll try we'll try to make everybody's job easier right. Once we start to have a few years of history. We can then present some charts that show the history in terms of sales and endpoint royalties of other.
Wheat varieties owned by competitors of ours over the maybe last five years I'm not sure what information is available from the Australian government, but I would hope that we'd be able to show you sort of ramp up curves right historical ramp up curves and where our stuff is obviously, we have to take that and.
Adjusted for which regional markets that we're in and you know it's.
It's hard to have a wheat anymore that is can grow in all of Australia. Just like you know the U.S. corn market is so segregated now by small regional markets. So we'll try to so it's not quite as easy.
Task as it might might sound, but will segregate that by region and provide the public and obviously the <unk>.
Analysts like yourself and it's our TCEP follow our company with better information about what are your expectations and should be based on sort of historical growth curves.
Perfect. Thank you on the only other question I have here is I'm wondering if you can just kind of elaborate a bit on the on the sunflower business that that's ramping up haven't heard much about that historically can you just kind of talk about kind of what you know what this product is kind of the geographic.
As you know distribution that you're looking at and and really where that stands in the in the commercial ramp.
Yeah. So you know sometimes in oil see that's the main use some of sunflowers argues for a confection uses they call them. So those are you know people, who eat sunflowers or their shelves and the end to end the sunflower coals are actually sold for human consumption, but most of sunflowers isn't oil.
<unk>.
And it competes with oilseeds like canola, which is another high quality oilseed and to a lesser extent like soybeans.
It and corn the corn oil is a small smaller percentage of the total yield of corn, but you know corn oil and.
So I'd be Noel our lesser quality oils, and whatever they need by that its canola and sunpower have higher smoke point. So you can use it.
In your cooking to whether youre cooking at home or in a restaurant.
Industry, that's a using.
Sunflower, it's a commercial oil you can.
Have your eat at a higher temperature, which usually translates to a higher quality product.
So sunflower by kind of culture is very popular in eastern Europe and Russia.
Yes, there are some flowers grown in the U.S., mainly in North Dakota, South Dakota.
Yes, there is some sunflower grown in Australia, but the giant markets are in eastern Europe, and the Soviet Union Soviet Union can be a difficult place to do business. So weve focused on eastern Europe, which we think is a bit.
Okay.
Better market access we started a breeding program about six years ago. So it's a fairly new program remember it can take eight years to have your materials.
Come out of your breeding program. In addition, it's a fairly sophisticated.
Product markets. So you do have genes in there right you have herbicide gene you have other genes that are need to be part of the package that you're offering and oil quality is is also a consideration. So you have to have the right.
Oil profile within sunflower, so it's not its difficult its difficult breeding that's solution no difficult than other crops rent, but but it's not that there's competitors. The big competitors are syngenta and cortiva of the before they they have most.
The market share over in eastern Europe, but.
We obviously think there's opportunities and you know, but it's a young program for us. So we're in the process of testing our first commercial hybrids in the market producing a foundation seed and the first generation commercial see.
And testing those with the with our customer base there.
So it is a new market and we don't talk about it much because it's still a couple three years behind.
It sort of product lifecycle, where we are in sorghum alfalfa in terms of book first real market introductions. So you know, which we're seeing in our in our long range plan, we see.
A couple of million Bucks go into five or 6 million Bucks of sales and sunflower in the next three year period, that's all out of memory, but it's probably close and you know it will depend on how Ah arbiter hills are hybrids.
Uh huh.
That's fine.
<unk>.
Got it that's very helpful. On yeah, Yeah, no no that was that was very very helpful. I appreciate that I'm I think I'm in good shape. Thanks for taking my questions all I'll jump back in queue.
More than welcome.
Again, if you have a question. Please press Star then one the next question is from Gerry Sweeney with Roth Capital. Please go ahead.
Hey, Mark and Matt Thanks for taking my call.
Sure Jerry Good morning, Gary <unk>.
I know you planned on doing providing a trade update.
I thought it was going to be late October, but it sounds like it got pushed back a little bit but.
Maybe.
If you could or I'm not sure. If you would like to do this at this current time, but maybe just talk about a little bit about maybe the market type opportunity and the licensing strategy that sort of comes with Somebodys tree.
But maybe coming out just so we can get it.
Idea of how.
Big the potential market share.
Sure.
Yeah. So.
The reason that.
We've been a few weeks delayed on presenting something is.
We.
We were pleasantly surprised we do surveys of a of our farmer customers, who have trials armed materials, our new materials for double team sorghum right. So.
We were very surprised pleasantly surprised by the.
Response in terms of how well the product performs in the field.
We think that.
And again.
There will be some communication the deck from us here in the next this month for sure.
The.
So the opportunity is a huge opportunity.
We think half of our EBITDA could come from the trade ins work.
Hum.
Somewhere in the neighborhood of.
$10 million to $15 million EBITDA.
EBITDA per year at market penetration.
Now, there's a lot of assumptions to that in terms of you know what kind of brought licensing.
Success do we have the big competitors didn't assort go market our.
Pioneer and Dekalb and will they take up the gene.
And put that into their products also that is a big determination of what a final EBITDA guidance will look like but.
It's a big number it's in that kind of range and so it's a meaningful.
At.
The increase in profitability Descovy.
It will make us a different company.
And at the same time, you know we have other genes coming and so the deck, it's complicated because like Monsanto did before it was purchased by buyer. We like we like that model, we were a little bit Monsanto biased me, having sold to companies to them, having sat on their AG word for it.
A number of years, having to add senior Monsanto.
People on our board you know, we tend to we tend to and Magento frankly, but what's the company that.
Introduce most of the trick to them in the market currently two to act farmers all around the world.
So you know we're very we're very optimistic that we're going to see as Monsanto did.
Somewhere around half of our EBITDA once we get the maximum market penetration coming from these traits we think.
It's a giant opportunity.
Just for point of clarity 10 to 15 million of EBITDA would that be from the double team.
Product.
Yeah at at maturity that would be from double team and as you know this is where out why it's a little bit.
Unfair to overcome all the.
People, who follow the company, both investors and analysts to not have the deck in front of me 'cause it will be much clearer in the deck, but you know you have different products.
Ramping up on different timelines right. So the first two out of the chute are they starting introduction this year and 21 or our D.T.S. nights you pay and then during three it's a couple of years behind that and then we have a couple of other.
Traits that were evaluating that are in preliminary evaluation and like Monsanto did we want to get sort of outline.
What what's what is consistent what this preliminary evaluation need what's kind of the middle stage evaluation, then when do we make a commercial decision and then how far out are we from revenue you know we will outline that.
In the deck that will prepare.
It will be clearer, but even with double team that $10 million to $15 million EBITDA contribution to S. W. Is you know significant obvious.
Obviously, given our current profitability.
Got it very excited I mean, we're just like Crazy you know we're sitting here guys that have been in this business for so long, we got huge growth rates higher than any other seed company.
And we got all these traits coming you know.
We can we were like giddy with anticipation that you work your whole career to find a situation like this right and where we're very happy with how things are trending out sure.
It's a tough business to operate in and that's why you need a good management team, there's always pressure on margins. There as you know we sell alive products. So sometimes there's inventory issues the inventory issues could be.
When your forecast of sales into production get out of whack it can be when.
Unforeseen a shelf life issues come up.
With your inventory that a you know that would based on history not have been expected.
All of these things can can make small changes, but you have to keep your eye on the.
General trajectory of profitability in the company and where it's coming from and we're just.
Absolutely, yes, where I as I said were giddy with anticipation of what the next couple of years is going to bring.
Got it that's helpful.
As those products roll out and you know.
Earlier in the conversation or in the call we spoke about distribution.
Do you need anything else or would you like to enhance distribution would you like to prove it to maximize that opportunity with these traits coming out for or are you in a good position I know we're in a good yeah. We're in a good position I mean.
You always want to have better distributors, you always want to sell your good distributors more product you always want to have the product spread between your different species right and alfalfa company that buys a $5 million from us obviously better than one that buys a million dollars from us, but about a company that.
By $5 million of mixed product of alfalfa sorghum sunflower pastor products you know that's the that's the guy that we want to make sure that we really take.
Take care of in terms of service and availability of inventories and stuff like that because.
You know that company has the ability to really grow our sales in multiple species and that's what we look for 16.
You know obviously you know this is not rocket science.
Common sense.
And how you look at your markets is what you're applying here right and but but the executions difficult you know we sell in over 40 countries now we sell six species, we have to keep with these high growth rates, we have to keep the.
Excellent forecasting of what we should be producing.
You know mother nature is not always cooperatives to some years. We think for instance, just as an example, you know you're going to get the 800.
Pounds of seed per acre and you get a good deal did you end up with the 1200 pounds of seed per acre well, yet you don't get rain you end up with 500 pounds of seed per acre. So you've got to factor that into your.
You know, you're you're planning, but it's but in general you know we have a lot of very positive things going both on the sales and marketing side and on the trade side and we need to continue to build those together I think we have the team from a management quality standpoint to do that.
You know I need to make sure that.
As the leader of the band here, and then I'm, keeping everybody coordinated and that we're focusing on the markets and the way that we know how to do and that we don't try to do too much right. It may seem to some people like we're doing too much but you know we're doing what we can do well and we're not really willing to do too much more.
At this point without you.
You know a significant change in management team or something like that but for the company that we have now in 100 million in sales going towards.
200 million, we've got the team to do that.
Got it I appreciate it.
Thanks for the info.
<unk>.
Yeah.
I appreciate your interest.
The next question is from Arvind Ballack with K M. S investments. Please go ahead.
Yes, Thanks, all for taking my question.
We are a value investment oriented firm and a long term investors and Oh.
Very grateful to there's some w. team on really turning around and.
Transforming the company you know it's been great to see the pioneer transaction.
All the benefits that have occurred since the balance sheet and the diversification strategy I wanted to turn back to kind of.
Just more macro because I think you've done a great job of talking about the operational and all.
All the other activities and engage with investors really went on but I wanted to really ask about it.
Earlier point, which is the commodity price environment and.
And I'm just linking what.
What you've said about how the alfalfa seed.
They didn't write down.
Just correlating dock riffs, alfalfa prices being quite soft for the <unk>.
Past year, then you were talking about your the strengthened sorghum seed.
Of course, that's a.
Hey, crop and crop that is doing really well. So that's clearly the correlation between how seed prices do and then crop prices do so.
So if I'm on a macro basis, if we see a.
Strong agricultural price recovery in coming years, what type of.
Pricing power as a seed company do you see some W. Having given that you've been in multiple environments.
Yes sure so.
Great question and.
I'll try to give us the sink dancer.
I think everyone's kind of learned that mark likes to talk too much. So I'll try to give us a good answer as I can.
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So there's two kinds of AG markets really right, there's a depressed AG markets in price and we've been in those for like the past three or four years.
Where.
At the farmer level, that's where you stick the thermometer right. The farmer is having a real hard time, making money.
Right. So he starts up there.
There are big farmers that don't have a lot of bank financing, but most farmers have some bank financing. So the bank has a lot to say about how much money. The farmer has to operate his business that particular crop year.
And when you have low commodity prices. So I'll talk about the you asked it it's maybe the easiest to understand.
So you know corn was 343040 cents, a bushel sort of early this year and that that price either.
Even if you own your land, it's very difficult to make money and so farmers on purpose sort of fall back into hunker down mode and start to cut their expenses and maybe by a little cheaper not the best see they can buy but the second best genetics.
And they put a little less fertilizer on and you know they they maybe.
Don't spray for diseases on their crop unless they actually see something instead of you know just automatically spraying the three sprays for fun decides blah blah blah, you know they they they want a really scout their crop much better try to save our fungicide spray you know so that's kinda.
The mindset of the farmer and we've been in that kind of market for the past three four years, yes.
Now with China.
Buying again.
Basically soybeans cotton and corn.
Prices are have uplifted to the point, where a farmer could make money once once a farmer knows that he could make money now his whole philosophy changes right these markets where commodity prices at planting time.
Basically tell him send are sending the message that man you should not be managing your farm to control costs, you should be managing your farm for the maximum yield because every incremental bushel that you get is profitable right. In every bushel that you produce is profitable if you could make the.
No minimum.
Crop and if you have you ever gave shouldn't you know you're going to make a minimum crop, but if youre also in kind of Ohio, Iowa the.
The big Corn States, where you don't even need irrigation you know you have a very high probability of making a big crop. So they buy the best seed that put a little more fertilizer as they watched diseases and insects like a hawk because every bushels worth money every bushels money in their pocket. So those are the kind of two different markets that.
Companies have to try to force C and manage towards right, so with but with a long breeding cycle of six to eight years and then a couple of years of seed production.
It's hard to be very responsive.
And so you know that's the magic sort of secret sauce that she company managements apply right. They take their experience and they try to make a call on what and having their product line mix of products. Some of the highest yielding some may be good yielding at a lower price and.
The you know that's the kind of product line that we try to offer to our customers.
Just a couple of comments specifically, so you know all AG markets don't necessarily work in conjunction with each other so you may have a week dairy market, which produces week.
Prices and.
Alfalfa.
Dormant alfalfa, which are used in kind of the Devry states in the U.S.
Minnesota, Wisconsin, New York State the northern Tier states.
And that may roll over to the worldwide demand.
Demand. So you know we had obviously the problem, which we've talked about before of Saudi Arabia, making a decision about Uh huh.
Having available water to produce alpha in country and so the biggest areas in the world, which you know are 100 150000 cows compare one opera men.
Many locations, but one company one operation compared to U.S. the biggest Gary the U.S. about 30 35000 cast they're giant dairies. So you know that affected us that that policy change affected us and so now you get a situation where there is a surplus of seed versus the man.
And you know, it's kind of a race to the bottom by seed companies because you've got a product that has a three four year shelf life. It and you better get rid of it or is that going to be worthless. So you've got to decide you know if you're going to cut price and when.
So it's a it's a fascinating business right guys like me, who have been in a long time, who know something about the different sectors. I mean, it's it's a yes you got it you got to have a stiff spy and make your call and what you think is going to happen.
So I hope that's helpful.
Thank you very much I was very insightful.
This concludes our question and answer session I would like to turn the conference back over to Mark long for any closing remarks.
Thank you operator, and thank you everyone for being on the call today as I said in my comments I I hope it came across in my presentation.
A presentation that we are and SW very excited about the future.
The next three years.
A real opportunity for the company.
And we appreciate the questions.
All of our investors.
Investors and analysts and Ah you know we will be a.
Coming out with some more information on our traits, but.
As I said sort of giddy with opportunity over here.
It's a but that's to be seen in the street.
Thanks, so much everyone.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
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