Q2 2021 S&W Seed Co Earnings Call
Good day and welcome to the S. N W seed company second quarter of the fiscal year 'twenty 'twenty, one financial results conference call.
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Please note that this event is being recorded I would now like to turn the conference over to Robert Blum with license partners. Please go ahead alright. Thank you so much and good morning, everyone. Thank you for joining us today to discuss the financial results for us the W. Seed company for the second quarter of fiscal 2021 for the period ended December 31 2020.
With us on the call representing the company of today are Mr. Mark Wong President and Chief Executive Officer, Mr. Matthews, Dodds Chief Financial Officer at.
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 the W. Seed company. During the course of this conference call may contain forward looking statements within the meaning of section 27 eight of the Securities Act of 1933 of the amended and section 21 E of the Securities Exchange Act of 1930 for as amended.
And 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 the results of our strategies and are generally preceded by words, such as bay of future plan or planned will or should expected anticipates 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 the forward looking statements as a result of various factors and other risks identified in the company's 10.
10-K for the fiscal year ended June 30th 2020, and other filings made by the company with the Securities Exchange Commission with that said, let me turn the call over to Mark Wong Chief Executive Officer, Brett W. Seed Company Mark. Please proceed.
Thank you so much Robert and Hello to everyone on the call today, it's always exciting to be able to speak to everybody of the management team, Matt and myself included are obviously very excited about what's happening the lesson W. And it's always a privilege to continue that story with all of you.
So just a reminder of a couple of things that are important when understanding what we're doing the lesson W is the management team.
We continue with the strategy of moving from our history of being a single crop company in alfalfa, but now obviously focusing on alfalfa, but also sorghum sunflower wheat stevia in the pasture products that we acquire.
Acquired in our acquisition of pasture genetics early in the calendar year last year and I haven't said much about the pasture products and so I wanted to just spend a minute.
Speaking about those.
They're mainly right now.
Our product line focus in Australia, although we're moving those products to the U S. Also.
In Australia, we you know we believe that there is a huge opportunity to improve.
Improve both of.
The past year.
And animal yields per.
Per acre in Australia, and we see some very innovative things happening on the passenger side. So.
On the animal side, we see people trying to manage the cattle on a much more the renewable regenerative basis. So there's this term regenerative agriculture, where animals really are part of the process too.
Who are the generate uptake of carbon into into the passengers and so we are we see the first deal in Australia, We'll mine cattle company.
In New South Wales, Australia, just announced the sale of $500000 of carbon credits. The Microsoft We think that's the kind of deal that youre going to see more of and we think our position in pasture products allows us to work with those cattle companies like one month in and Oh.
And create these kind of opportunities also I'm not sure of in my background, but the that people know this but I was the CEO of the Pacific fruit company in the U S, which is a one of which was 20 years ago. When I did this one of the biggest apple companies in the U S up in the Wenatchee.
The Yochum, Washington area, we had about 15000 acres of apples and cherries. So you know I have I have a big background and permanent tree crops.
And as you all know lots of people are looking at these pasture and cover crops for almonds avocados are the apples cherries of the the crop side was in before and we just think that there's a real opportunity to basically improve.
Improve soil management and improve water conservation of in those acres and so you know I haven't spoken much about pasture products, but where we're really excited about the opportunities that we think of those products will will give us in the future.
So continuing on though.
Now again, we are.
The only company that has an integrated technology.
And that means in our definition of traits and also.
Germ plasm elite germplasm that we develop ourselves so that combination of putting those traits into our elite products for farmers as what we do and we're focused as you've heard before on those crops that are the next largest in acreage after kind of corn.
Soybeans and cotton the big crops that are the big for our mostly concentrated on so we continue to develop those crops. We were excited about our trade programs that we announced in December.
Our first trade the introduction that's happening as we speak in the northern hemispheres.
The spring planting season, so where we're gearing up to introduce our double team sorghum, which is a broad spectrum grass herbicide.
Debt, we gene that we have the embedded in our elite sorghum products and the then in the fall we're going to be.
The concentrating on introducing our first the alfalfa trait and that's our improved quality trait, where we basically down regulated.
The lignin pathway and and we've created a more digestible alfalfa for dairy and beef cows.
So we're pretty excited about all of those of you know traits take a long time to develop but it's somewhere around six to eight years. So when a company like ours has these traits to put into the market. Finally, it's been a long process and the long wait in a lot of hard work on the part of our technical.
<unk> and research people and you know it's a it's a great.
The opportunity to show the market what are kind of new and innovative products, we can develop.
So we're really excited about those traits coming we're really excited about the fire six crops that we're in.
And as I said you know.
We're looking always as in the pasture products for new innovative ways to use of the traditional products and new ways that are that the AG markets are calling for so.
All exciting things at SW.
We also you know.
Find ourselves in a very excellent AG market and so the the.
The commodity prices continue to be strong corn is up about 45% the commodity price for the number two yellow corn.
It's up about 45% over the last year at the same time in sorghum.
It's about the 30% over last year's commodity price. So our farmers are excited to see what planting decisions based on whether.
They're gonna economics, Theyre going to make this year and we're coming up to that seed.
Isn't right where in.
In the northern hemisphere, especially in the U S. You know we start the seed planting.
And the southern part of the country in March and marching north as the as the weather warms and soil temperatures. The increase so it's an exciting time for all seed companies ex again, it's a great time for the seed industry and for other input industries because.
Commodity prices are high and farmers can make money.
So the the net improvement.
The improvement for Us, we're pretty as I said optimistic about this year, you're going to hear some details from that about the our sales forecast for this year, but I want to tell you all that the you know for 2021, the full fiscal year, we think core revenues were.
The increase our guidance, we think core revenues are going to be in the sort of 78 to 81 million dollar range for our core business and that means not counting our pioneer business, that's about 30% to 35% above last year the growth mainly coming in the U S and Australia are our two key mark.
That's the the two markets that are the sort of linchpins of all of our strategy.
And as we integrate our acquisitions so the chromatin acquisition in the U S, where we acquired sorghum and we frankly acquired the double team trade and the pasture genetics acquisition.
About a year ago in Australia, those those have really strengthened our operations and our understanding of the market and our ability to deliver products to the market and so we'd like to.
Tell the market the tell all of you that we're gonna be increasing our guidance.
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So for the full year of accounting pioneer.
We're saying our sales will be 92, and a half to 95 and a half for the full 2021 year.
So that's really exciting for us all of our management and employees are working hard to make that happen and that will give you. Some more details on the kind of the financial picture for the company.
But it's.
It's it's the looking like one of those years that are we all are in the AG business for good commodity prices.
The exciting introductions of new products from our breeding programs and in our first trades into the market. So all good.
The things for this year.
So that's and then you know that's obviously translate into increasing our guidance for the year. So with that I think I'll turn it over to Matt and he'll give you some of the details on the.
What's going on from the financial side of the company, Matt Please up to you.
Thank you Mark and thanks to everyone joining us on the call. This morning, So just jumping into the second quarter results core revenue, which excludes revenue of the pioneer was $11 million for the second quarter, an increase of 20% compared to $9 2 million in the second quarter of the prior year keep in mind that we also delivered core revenue growth.
The 59% during our fiscal 2020 period.
Total revenue, which includes revenue of the pioneer was $15 1 million for the second quarter compared to $12 4 million in the second quarter of the prior year.
Now as we look to the remainder of the year, we are increasing our guidance for core revenue and total revenue. We now expect core revenue to be within a range of 78 to 81 million for fiscal 2021, representing core revenue growth of 30% to 35%.
This rapid growth is expected to come primarily from our two key home markets of March touched on in the United States and Australia.
And as a reminder, we previously provided guidance that core revenue growth with increased 22% to 32% year over year. So we are pleased with the how the second half of the year is looking based on our latest sales forecast process.
Also we expect total revenue, which includes contribution from from pioneer for the current year to be within the range of 92.5 to $95 5 million.
Now quickly turning to gross margins GAAP gross margins were $13 five per cent in the second quarter of 2021 compared to GAAP gross margins of 17, 7% from the second quarter of the prior year the.
The decrease in gross margins for the quarter was primarily driven by strategic lower margin off balance of sales into certain regions and were there for.
Most of the gain market share and also target of low margin sales of clear actions inventory. This is also calling that excess inventory specific telephone for all of that this was coupled with the absence of certain higher margin products sales, which shifted from the second quarter of this year kind of third quarter of 2021.
And as discussed last quarter, we are expecting gross margins in 'twenty and 'twenty one to show meaningful improvement of all of the 2020 and this improvement is expected to come primarily from the growth of our higher margin assortment of products and overall sales mix in the second half of the year.
Our adjusted operating expenses for the second quarter of 2021 were $9 4 million compared to $8 million in 2020 the.
The increase in operating expenses for the second quarter can be attributed to additional expenses from the acquisition of pasture genetics, which occurred in February of 2020, and additional investments in our sales and marketing and R&D functions. We expect the operating leverage will continue to improve in the second half of the year as we enter the primary selling season.
And as previously mentioned over the last several quarters, we have made several investments in purposeful spend in sales of marketing and product development functions.
Now we've discussed during the last two quarterly calls, but I'd like to clarify all of the body.
Our guidance for operating expenses, including pasture genetics for the full year, we expect full year fiscal 'twenty 'twenty, one operating expenses as follows SG&A to be approximately $22 million, which excludes noncash stock based compensation of approximately $1 5 million.
Research and development expenses to be approximately $8 million in fiscal 2021, and depreciation and amortization to be approximately 6 million.
Now at the adjusted EBIT of line, we had negative EBITDA of $5 5 million for the second quarter as compared to negative EBITDA of $4 2 million in the prior year. The second quarter of this year was impacted by timing shift of product revenues. The pioneer. So please note that we will recognize the remaining $9 million of pioneer revenue during the third quarter of this fiscal year.
The second quarter was also impacted by lower margin of about the sales as well as our purposeful investment in both sales and marketing and R&D functions.
So based on the improved seasonality throughout the remainder of the year, which includes the trend towards higher margin products. We believe you'll see significant improvements in adjusted EBITDA in the quarters to come.
As we leverage our infrastructure and deliver core revenue growth of our goal continues to be driving towards positive EBIT contribution over the coming periods.
Now quickly moving to the balance sheet I do want to point out that we continue to make progress in reducing our inventory levels and freeing up working capital. We've talked about this for several quarters now, but I'd like the stress out of her out of style for inventory balances have decreased approximately $18 million or 20 per cent of the last 12 months and we expect this trend to continue.
During the remainder of this year and then for 2022 and.
And when you look at our total inventory levels for December 2020 versus the same time last year, our balances are down approximately 5%, but this is even after taking into an account and 8 million increase in inventory from the pasture genetics acquisition as well as strategically increasing production of all of our projected increase in sorghum sales.
This progress is a reflection of the ongoing efforts to continue to reduce alfalfa inventory balances and convert this inventory to cash.
More work is ahead of us, but we believe we are on track and we've made significant progress.
So to summarize we're continuing to execute against our plan the year to date results through December represent our seasonally lower volume of lower margin business. This will act as the pivot to what the remainder of this year will look like with improvements in core revenue gross margins and of course further leveraging our infrastructure so with that I will turn the call.
Back over to Mark.
Thank you, Matt and the so I just wanted to conclude by reminding everybody. We are extremely excited about our improved sales outlook, we think that our strategy of.
Expanding our offerings to our six crops and including trades is it.
Starting to show real progress and that the given also the buoyant egg commodity price pricing and the expectations of farmers for a good year that the 2021, and frankly 2022 are going to be really good years for the AG industry in general and for S and W. In.
So thanks, all for being on the call today, and Oh, we're going to open it up for questions. So operator please.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from circa sort of bet Sheehan with B Riley Securities. Please go ahead.
Hey, good morning, and thanks for taking my question here.
Good morning Sarkis.
Yeah. So.
Just wanted to touch on the increase in the guide you know clearly a positive step as we head for the back half of the year.
I just want to understand the the cadence of sales and margins for the back half of the year kind of given what we've seen so far year to date, Matt I think last call you mentioned on the year of 23% to 24%.
Gross margin levels is that still the target that you plan to achieve or should we think about that differently.
Yes, Keith I think of for the back half of the year.
For the full year Sakes, we're still excluding the inventory write down we took in Q1, we are still expecting gross margins to be in that $23 40, 24 per cent range for the full year and so as we look to the back half of the year. That's not we're looking at margins in the mid 20 mid <unk>.
$25 27 per cent for both the Q3 and Q4.
And then from a revenue cadence Rfps. If you are looking at the.
Midpoint of the new guidance, we guided to which is it would be about $94 million of that amount I havent seen about 45 per cent of that second half of the year is going to be recorded in Q3 and the rest of what happened in the Q4, obviously, that's obviously subject to.
The timing issues and potential timing delays, but overall, we're feeling good about for the guidance we've given.
Got it thanks for that and in this guide up have you contemplated the.
The double teams sorghum trade, that's essentially being commercialized you know kind of as we speak are there any potential license opportunities that are being factored in there just kind of trying to understand.
What the trade introductions mean to the business for the second half of the year.
Yeah, so sort of case, the as I've said before you know the the.
The whole product development cycle of the six to eight year cycle. So.
You know relatively slow compared to maybe some other industries, but.
You know in the first years of of New product introduction, you usually are limited on your seed supply just because the parent seed that we have can't be multiplied quick enough to satisfy all of the demand in the marketplace.
The first year, which is this year you know the spring, we're coming into where were really kind of where we know we're gonna be sold out.
We're going to obviously establish the what we think the value is for the trade. So you know we're going to put a price on it we haven't announced that price yet, but we will as we get closer to the circumcision in the U S and it's the U S. Introduction. So all of the seed this year will be planted in the U S and in the situation.
Like this where we are in.
A situation, where there's more demand than supply, we're very careful which farmers, we're selling to we want what we call Bell cow farmers the guys, who really are the professional.
Best of farmers and their counties, who know.
How to plant the seed and have a problem with grassy of weeds, which is the target.
For the herbicide and it's most important to us frankly not to have the sales of dollars, but the have the following of key customers in the market. So that next year, which will be significant in terms of sales the 2022 year.
We're off to a really good start so from 'twenty two to 'twenty three are demanded supply will come.
For imbalance and by 'twenty, three I'd say.
There'll be a significant contribution from the double team trade to our sales, but more importantly, because of the margins to our profitability.
In terms of the licensees, we're starting that process now we're talking to the major.
Share holders of sorghum share in the U S and as we've said before think of US as following a lot of the strategies, we learned that Monsanto and the you know we're in the process of of vetting the technical performance of <unk>.
Our gene and our germ plasm with those potential licensees, so more on that as they and we see the performance of the product in the field this year.
Great. Thanks for that and just one more for me and I'll hop back in the queue. You know I'm trying to reconcile the essentially one of the business begins to generate operating leverage and you know certainly the back half of of the fiscal year of seem to be one when we'll see more of that relative to the Opex line right.
The marker of Matt just help me understand when would we expect sustainable profitability. If you can maybe just give us a milestone to expect there from a timeline perspective. Thank you.
Yeah, I mean, I've said in past calls that given the kind of growth rate, we have in sales and our improving margins both because of mix.
In the short term.
And what other than what I mean by that is on a relative weighted basis more grain sorghum sales versus.
For it sorghum and alfalfa sales.
I still expect that the 2022, it's gonna be a breakeven EBITDA per year.
Lots can happen in good and bad between now and then but obviously in six months from when we prepare the budgets and we are and our board reviews that we have the opportunity to convey that information to our to the investing public.
We'll be optimistic that the.
The break evens definitely a possibility so you know.
As Matt said, many many times on many many calls.
We've spent the money on sales and marketing and R&D to give us of the position that we have in products and in traits.
Can that spend will continue because we want this to be of continuous processing for our germplasm to continue to evolve to better products and of our traits to continue to be discovered and marketed through our proprietary germplasm and through our licensees and so.
We think that are where we're going to start seeing in 'twenty two real.
The contribution to earnings based on the trades and the and the efficiencies of basically having invested in the business for the first three or four years of my being here and finally seeing the financial rewards for that so we're already seeing the product rewards for that right, but it just takes a while to.
Convinced of our customer base and win new customers and so.
We're optimistic that that's now the point of inflection that we're at and.
That's why we're increasing our guidance sales are going well and our two home markets. Our two strongest markets and we expect that to continue into future years.
Thank you that's all for me.
You're more than welcome.
Again, if you have a question. Please press star and then one to be joined into the queue.
The next question comes from Ben <unk> with National Securities Corporation. Please go ahead.
Alright, Thanks for taking my questions first Matt I just have a quick clarification question for something you said around pioneer of revenue did you say that you expect the remaining $9 million of pioneer revenue to all be recognized in the in the third quarter did I hear that right.
That's right and that would bring our full year revenues for pioneer to just under $15 million.
Okay got it.
Perfect.
Then mark of a question on your comments at the very beginning of the call when you talked about the.
Your your perspective on pasture products and grow adoption in the U S. Given the sustainability benefits.
Do you also think theres any real potential for you to leverage of breeding capabilities within these crops.
And then integrate more technology into them or.
Given that they are relatively small acre.
You know on an individual basis does it does it just not make sense for you to invest too heavily in R&D there.
Yeah. So in the short term that's of Great question, then and one we wrestle with all the time, because obviously, there's near term costs because of the long development times of some of these products, but also there's a long term benefit and you know where where such an interesting company.
I'm and I'm glad that the public is starting to appreciate that you know where we have technology.
We're not as technology focused as some of the smaller companies in the AG industry, but we do have technology and but what we also have as you know we got the based on our guidance here. We've got 100 million itself and you kind of look long as far to find the company that has both.
<unk> and the ability to distribute it in real products right. Other technology companies are really dependent on doing deals with companies like us where the big guys to introduce their trades in the market. They really don't have the basic seed position in breeding programs to have the product.
To put it in the market. So we're always wrestling with this you know a question about what technology should we be investing in because frankly, the technology toolbox is getting easier to use and cheaper to use there for than when I first got in the market. Obviously now of long long time ago.
40 years ago, and we were doing a GMO products with the you.
You know.
The bacteria of vectors and now you can just use CRISPR. So.
We're looking at it all the time I can say, though that in the near term, we think it's really important to crossover into profitability.
That is our focus now to take advantage of those.
Scale opportunities that Matt has has talked about before where we're really building sales based on our investments that we've made in sales and marketing and R&D in the last for years and we want to see that come to fruition right. We want to be in a position where we are.
Our cash flow breakeven or generating cash and AR and we get the benefit of that in terms of longevity and the ability to raise new capital for acquisitions in all of the things that are that come with that so it's a great question. It's one that we wrestle with all the time.
Not a clear answer, but hopefully I've, given you a little bit of sort of the plus and the minus of how we're walking the balance beam of technology to both have proprietary products in the market real sales and the ability to generate our own technology based products.
Yeah, no that is helpful. I appreciate those comments.
The last one for me around the ramp of the.
Inventory levels are in your double team sort of them can you just kind of talk about.
How that inventory ramp has developed over the last year and kind of what your approaches is going to be over the next couple of years from the perspective of.
Are you looking the are you looking.
Looking to build inventory off season in South America are you.
Or are you.
And kind of one of the limiting factors that are keeping that inventory build to.
For the level that you expect is there you know the reason to believe that there could be a dramatic increase in inventory levels. In the next couple of years beyond what you are kind of internally targeting.
Sure.
So as I said you know the traits are.
Fairly long term to develop six to eight years.
So the original work was done by chromatin. So when we purchased the company. They had done many years of work and we were in the position to.
Evaluate basically the the gene that they had nobody due at that time with of the gene was really functional right and you need to have a herbicide resistant gene that's basically 100% functional the farmer does not want to spray over the top of his sorghum field for his grass weeds in the member sorghum.
There's also a grass.
We have some of the saga of plants die right. He even if you control of the week. She doesn't like it went as is the target crop sorghum is also has a few plants that die and so even a couple of percent of.
The plant in your bag of seed that do not have the gene can be problematic and so we had to evaluate the performance of the product for two years.
In the field and we made the decision this year than it was a really the gene was really functioning well and remember we develop the steam and our own technology through a tissue culture process that we have.
And we always are working on other herbicide genes using that tissue culture process also.
But we decided that the the gene was ready to go basically and that of whats it would perform well in the farmers' field and farmers would be happy with it. So we went to off season production in Puerto Rico remember that sorghum grain sorghum, so of the genes and grain so all of them that's our first product.
<unk>.
The.
The grain sorghum is a three well is the hybrid and it's the three in line system. So it has a male or female and of restore gene. So we have to sort of increase the seed of all of the parents and then where you can produce the seed that we sell to farmers by planting the male and female seed.
And in the.
Contract Farmers' fields that we are and that's how we grow our seed so we.
I went to Puerto Rico, we are we had some problems frankly with COVID-19.
We couldn't get our people into Puerto Rico. It was just sort of one nightmare against another so when we say we're excited about the product and now we do have a smile on our faces because of lot of our employees did some really hard work to sort of get these productions off season that you mentioned.
You know to be successful a lot more work than we normally would have to do if COVID-19 was not a problem.
And then in international travel was not a problem. We also did some seed increase in Mexico, and so that was the another place where we felt there was an opportunity to get basically two crops in one calendar year and we will.
We're still thinking about what our plan is going to be for 2020.
One for 22 that sort of off season year, we'll probably do some off season production.
But we also have technical.
The improvements in the hybrids and the gene that we're working on and so you know it's always.
An improved product for the farmer that we're trying to produce and.
There's always continued work doing that in the first couple of years of any product watch. So we've done this before we've introduced herbicide resistance in other crops cotton being the main one in previous.
[laughter] in previous iterations of the management team and in the as the CEO and.
In my last company.
When we sold that to Monsanto, there was about $75 million of embedded profit Montana.
Monsanto gene profit in the products and that's why they obviously bought the company. They wanted those the embedded gene profit and so we've we've been there before that doesn't mean, it's any easier but it does mean, we've made our share of mistakes in the past and we've learned from that and we're not going to do that again so.
Yeah, there is some benefit to experience.
It's the exciting time and as you say, we will have to go to do some off season production to keep the amount of seed available.
The farmers.
The supply and demand equation that I sort of talked.
<unk> talked about.
Previously.
For 'twenty, two and 23, we're keeping a sharp eye on that.
Got it very helpful.
Perfect all right well thanks for taking my questions I think that does it for me I'll jump back in queue.
Thank you Ben.
The next question comes from Gerry Sweeney with Roth Capital. Please go ahead.
Yeah, Good morning, Mark and Matt Thanks for taking my call good morning, Jamie.
Yeah.
Mark.
Kind of touched upon that for a little bit and this was actually a question I did want to ask you from prior was.
Obviously, you're building out.
Trade trade development all of the technology around that you do have some distribution here in the U S Australia of pasture genetics.
At what point does S N W.
Become an attractive company.
For other of these technology.
Technology companies that you mentioned.
The sell to you I'm not looking for you to sell but maybe.
At some point do companies start coming to you and say Hey, you got a lot of attributes of the middle market.
And the distribution.
Is that an opportunity in the you know the midterm.
Sure Gary Great question also.
Yeah definitely it's an opportunity and definitely we are in those kind of discussions with companies all the time.
We are always focused on our six crops right. So how these discussions are usually generated as.
We know all of the technology companies they know us.
I've been in the business 40 years I know all of these guys and you know it.
It's always a good the discussion because with that.
Sort of common history comes you know the ability to just kind of get to the point and talk about what the opportunities really are where we're under C. A with most of those companies.
Continuously so it allows us to interact with them and basically they they and we are focused on our six crops right. So there.
And they have a trade debt or a product improvement that they think has a market opportunity in one of our six crops, they usually or we usually call them once they make an announcement, but they usually call us.
Cuz.
We are that's our specialty the big guys are focused on the big for a focused on corn and soybeans and cotton, yes, some of them sell sort of them yet some of them self sunflower, but you know it's different for a big company as efficient as they are in profitable as they are it's different with them because they know where they make their money in it.
In corn, soybeans, and cotton and if the small technology company once the introduce something new sometimes it's better to be partners with us because they know we're going to pay attention because it's important to US also so we tend to get opportunities and.
In discussions in our six crops and the and that suits us just fine because.
It goes along with our own internal technology capabilities and it allows us to sort of see what the other people think of.
The opportunities in our six crops and so it's a great opportunity for us to have some pretty interesting discussions about the where the six crops are going and what industry improvements.
Sort of coming.
And people are talking about how do you use these crops and bio fuels how to use these crops and renewable plastics. These are all discussions that we have.
Many times a month with the with different technology partners. So it's a really fun time to be of seed integrated seed company with the with the ability to.
Carry trades through distribution and have your own production, it's a great time to be in these six crops and.
We think theres only going to be more of an interesting news.
In the future because the phone.
We're starting to focus on the crops that we focus on and we think it's a natural evolution of the of.
Of both technology of the seed industry in general.
Got it and.
The question of its probably inverted.
Two questions for probably inverted but the the.
First of all of us sort of a natural progression but.
And I may have asked this in the past but.
The middle markets, maybe underinvested by the Big guys just from a kind of maybe pure business of economics.
The reason.
Is there anything you would like to have improved invest and acquire to sort of broaden out or better position.
The market.
I know, it's a pretty wide open question, but.
I'm smiling, because you're such a smart guy and I'm trying to figure out what.
How much I want to say about that right because that's why I ask questions I'd ask a broad question.
Okay.
Yeah. So yeah do I really wanted to sort of stake out ground here or July.
One of the sort of keep some things a little bit of just the best you can differ.
I'll just ask it.
Your ear of smart, you're a smart guy all of the analysts that follow this sort of really smart guys and we appreciate that you Oh.
Pay attention to us and are interested enough of an egg in the seed industry to the put the time at the understanding of SW I'll, just say you know what we really liked the pasture of area.
Obviously, we're moving those products.
From Australia to the U S and so U S acquisition, the bolster our product line and passengers are sort of North American acquisition that would be something we would.
We would consider.
Okay.
We have built up our distribution in the U S and Australia through the chromatin and through the pasture genetics acquisition. So we're pretty comfortable that we can reach farmers that we can reach bigger customers that we haven't sold before like distributors from co ops and people like that.
So.
No.
That's kind of all I want to say, obviously, there's some other things that we're working on all the time, but you know.
Sometimes it takes it's like.
A fine Scotch while it takes a few years for these ideas to kind of the.
Blossom and age a little bit so that the so that they really.
Looked like an opportunity and are worth putting time and money into because nothing in this industry is free as I said, they are pretty long product launch timelines and sell once your research and product development pipeline is full of like ours is now.
That's that's when when management's happy not when you're spending all of the money and all of the years to develop these things so.
That's why we're so excited and that's why it's such a fun.
It could be a part of the management team at SW right now.
Got it.
That's it for me the.
Turkey's Scott My other 10 questions about there so I'll make a shape of <unk> right great Youre welcome.
The next question comes from Sarkis <unk> with B Riley Securities. Please go ahead.
Hey, Thanks for taking my follow up here just a quick one on the recent announcement for the five points of California facility sale, maybe help me understand if the $1 billion in annualized cost synergies from consolidating the.
Of the plant ops from California to.
I believe it was the nampa and and and and the New deal, Texas facility is that contemplated in the go forward gross margins or is there a potential benefit there.
To think about.
Yes. The answer is certainly yes, sure sort of key so those are those costs.
Basically the reduction of those operating expenses are in the stock now, but keep in mind that those reduction in plant production costs are in essence, reducing our cost of inventory. So for the next six months is really just kind of be reducing the cost of the carrying cost of our inventory on our balance sheet and Nasdaq.
<unk> sold through in the next fiscal year, that's when we'll see that flowing through the gross margin and obviously EBITDA line items.
So it's really more of an upside for next year as opposed to a P&L contributor for the next six months.
Right and that's predominantly alfalfa right, that's the way to think about it.
That's right. The five points facility was part of Merit was all of non dormant alfalfa, reaching so by consolidating those operations from snap all we're really increasing our throughput and reducing our overall cost per unit and I'll stop of production.
Hum.
Okay, and so as we kind of go back and think about the inventory write downs in alfalfa, the strategic selling into perhaps lower margin regions to gain share I guess.
And your inventory reduction in alfalfa like do you think next fiscal year is shaping up to be better for your alfalfa line as well I know we spent a lot of time, you know clearly on the sorghum and growth in the nice margins you would expect there, but I just wanted to also touch on the alfalfa and.
Do you think the business is shaping up for next year and you know.
Of whether there is an opportunity for potentially realizing improved margins and pricing in the crop.
Yeah sure. So I guess, one just to clarify so the U S is the most expensive place to produce non dormant alfalfa. So we've made a concerted effort to reduce production in the U S of moved out production to lower cost regions, particularly Australia the cost of goods in Australia as the signet.
And the lesson and doing that in California, So taking that step as well as working through our existing inventory levels of certainly lining up for us.
Nice year over year improvement in alcohol for margins, we still have a bit of work to do.
But with that being said the market is turning for us I will say that in.
And the San Joaquin Valley, and Imperial Valley of California, which of the two primary regions, where you would produce non dormant alfalfa in the United States.
Production levels for all of it just the overall industry is down the 10 year low so that says all the.
Aligning up for some positive <unk>.
Rice of movements here in coming periods.
Great. Thank.
<unk> please.
Yes. Thank you.
This concludes our question and answer session I would now like to turn the conference back over to management for any closing remarks.
So this is mark long and thanks to everybody for being on the call today.
And Matt have said, we're very excited about the the current situation of the lesson W. The remainder of this for fiscal.
Fiscal year, and then looking to 'twenty two.
And.
We have increased our guidance because we think that our sales are really starting to go pretty well and the investments that we've made in sales and marketing of new sales teams sales training all of those kinds of things are starting to pay off so.
As I said, it's a it's a great time with the commodity price is being what they are to be in the seed industry and to be part of vessel W and we're.
Very thankful for that opportunity. So thanks again to everybody who was on the call today appreciate your the your interest in SW.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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