Q2 2021 Marrone Bio Innovations Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Marrone Bio innovations second quarter 2021 earnings conference call.
At this time all participants are in a listen only mode.
But we will conduct a question and answer session and if you would like to ask a question during that time simply press star one on your telephone keypad, if anyone should require assistance during the conference. Please press star zero.
I would now like to turn the conference over to MS. Linda Moore General Counsel. Please go ahead.
Good afternoon, everyone and thank you for joining our call.
Welcome to the <unk> 2021 second quarter earnings conference call for Marrone bio innovations.
Our presenters today are CEO, Kevin he lash and CFO Sue Cheung and they will be joined for the Q&A by Kevin Hammill, Chief manufacturing Officer anti.
<unk> senior Vice President of International sales and the meat fast, Nevada, Chief Technology Officer, and senior Vice President of research and development.
If you would please refer to slide two I would like to remind you that this conference call may contain forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 regarding managements future expectations plans project.
<unk> forecasts and prospects.
Certain material assumptions were applied in reaching these conclusions in making these statements.
Therefore actual results could differ materially from those contained in our forward looking information.
Important factors that could cause differences are contained in the reports filed by the company with the Securities and Exchange Commission, including under the heading risk factors M DNA and elsewhere in the Companys Annual report quarterly report and other filings.
The company expressly disclaims any obligation to revise or update any guidance or other forward looking statements to reflect events or circumstances that may arise. After the date of this call.
After our remarks, we will hold a question and answer session.
I will now turn the call over to our CEO, Kevin He lash Kevin.
Thank you Linda and thanks to everyone joining us on the call today.
If you would turn to slide three when I joined the company 12 months ago I hold loans, what we believe to be a clear path to profitability.
Core to this where three themes one accelerating our top line growth with brand extensions and global expansion.
Leveraging our pipeline to bring novel applications products to the market that create the greatest returns for all stakeholders and three being brilliant at the basics of running a company with a keen eye on operating expenses and cash flow.
I'm proud to say that the team has made significant strides on all three objectives.
The discipline focus and strategic mindset that permeates. The MDI culture has allowed us to proactively manage challenges we face in the second quarter, while staying the course for our long term success.
Agriculture is never smooth sailing and our job is to ensure we ride out rough waves by being dynamic and flexible ready to adjust course, while remaining committed to staying on track to deliver on our targets.
The second quarter was a test of our ability to manage the unexpected and control our controllable.
If you would refer to slide four our revenues grew 3% in the second quarter, but were down versus our expectations due to several external headwinds.
The widespread drought in the western United States combined with supply chain and Covid related challenges in Europe, and Latin America brought more pressure to bear on our sales growth than we had originally anticipated.
Despite these challenges we once again delivered strong gross margins and prudently manage our operating expenses.
Our ending cash was up and our adjusted EBITDA improved significantly.
The end result, as we've managed our business to hold the line on the bottom line.
We are highly confident in our platform.
We're in the right markets with the right partners delivering the right products to meet our customers' needs.
Note several recent proof points.
First as we show on slide five we continue to benefit from the diversification of our portfolio and our strategic emphasis on row crops in particular.
Strong global demand for corn, and soybeans have depleted inventories in the distribution channels and key growing areas.
As a result, the outlook for the 2022 growing season is strong, particularly for our seed treatments.
Underlying the near term demand is a longer term shift to more sustainable high performing products, which is the heart of the MDI portfolio.
Second as shown on slide six we have forged partnerships with many of the most influential players in agriculture.
We supply the top distributors in North America, and have excellent relationships with leading distributors in Europe, including core Teva.
We also recently announced an expanded agreement with <unk> one of the largest distributors in South America to represent our biological seed treatment for nematodes and sold dwelling <unk> in Brazil.
This provides us with an excellent opportunity to participate in the $1 billion Brazilian seed treatment market by 2024.
Third our four new product launches are progressing on track as we show on slide seven.
In the United States, we are very pleased with our first year sales of pacesetter and expect to be on 250000 acres of corn and soybeans this year.
This is a fantastic start and a great platform from which to build upon.
In Europe, we're seeing strong demand from our channel partners for Optima Takla and impact we expect these three products to quickly become material revenue and profit contributors.
We've also highlighted our bio herbicide platform on this slide.
We believe the market demand for a bio herbicide is phenomenal and we remain committed to bringing a viable solution to our customers in the near term.
I'm pleased to say that we have had some exciting breakthroughs over the past year that have the potential to materially advance our herbicide program.
At the same time, we've made fantastic progress with.
With MDI 306, our next generation seed and soil treatment for insects and nematodes.
As we move this project towards regulatory submission.
It frees up research and development dollars and resources to be redeployed to other projects like our bio herbicides.
This is great news on multiple levels and we hope to provide updates on both platforms in the coming quarters.
Also on the R&D front, we announced a new collaboration with Terramara earlier today.
<unk> novel Technology platforms will combine with our powerful screening and bio processing capabilities to enhance our product performance and accelerate time to market.
This is a model partnership for us and part of our ongoing effort to tap into new advancements that will complement our strong R&D pipeline.
Finally, if you would turn to slide eight our Michigan manufacturing expansion project is progressing on budget and on time.
We passed a major milestone in July by successfully producing our venerate product at the facility for the first time.
The quality of the product is excellent and our capacity utilization is ramping up in anticipation of growing demand for this product.
But it started the year, we will be switching to a $24 seven production schedule to meet the demand of our products.
This is a testament both to the value we create for growers.
And to the expanded capabilities of the manufacturing teams.
The first half of the year is behind US now and we can't replace all of the loss revenue in the second half. However, we are in this game for the long haul and I firmly believe our first half revenue does not reflect the momentum. We are building nor is it indicative of our ability to grow the business through the remainder of 2021.
Sure.
Looking forward I continue to perceive that we'll be on track to deliver historical topline growth in the second half of 2021, while maintaining our strong gross margins and delivery delivering upon our commitment to continuously improve our bottom line quarter over quarter year over year.
Slide nine illustrates how we will bridge revenues for the year.
Sales into the U S specialty crops are expected to contribute 45% of the second half growth.
We expect a normal progression as product moves into position in the distribution channel as we complete the second half of the year.
Another 25% will come from seed treatment sales in the United States again, following a typical pattern. So that product is ready for use for the upcoming 2022 growing season.
One quarter of the growth will come from seed treatment sales internationally.
And Europe disruptions in the supply chain and distribution channel delayed sales originally forecast for the second quarter by.
By year end, we expect to recover much of those sales.
In Latin America, we anticipate some easing of COVID-19 related restrictions that have slowed outreach to growers.
We anticipate this.
Along with strong commodity prices and low channel inventories will translate to increased demand going into the 2022 growing season.
The final 5% comes from growth in our Central America sales for specialty crops.
As in the first half we are seeing good response to our products in this world area and this is a good contributor to our international growth in specialty markets.
A disciplined approach to operating expense management remains key for this company.
And we have a relentless focus upon running a highly effective and efficient organization at all levels.
The end result is that we were able to reduce our operating expenses without jeopardizing our ability to invest in our key growth initiatives.
As you would expect we are carefully managing our use of cash in light of our revenue expectations. This year.
Our objective is to achieve adjusted EBITDA breakeven through new product launches global.
Expansion and broader distribution backed by a robust R&D pipeline.
As we have demonstrated through the second quarter, we can effectively manage near term disruptions maintain our momentum and advance our long term strategic advantages.
With that I'd like to turn the call over to Sue.
Thank you, Kevin and good afternoon to everyone on the call.
If you wanted to refer to slide 10 are two trends that support our commitment to.
Cheap positive adjusted EBITDA.
First.
Continued to deliver strong gross profit on gross margin and <unk>.
Second we continue to effectively manage spending.
As a result, you can see a positive upward trend line emerging with.
Adjusted EBITDA.
Our second quarter revenue was up $12.6 million marked our 12th consecutive quarter of revenue growth.
However, the pace of gains that we made was.
Somewhat offset by market conditions and supply chain and COVID-19 related challenges.
Our product mix continues to move in a positive direction.
Is that reflected in our gross profit and gross margin.
The gross margins were 61, 7% for the second quarter at 62, 3% for first half.
Although next in any given quarter might shift our gross margins.
All this margin strength driving our continuous improvement at the bottom line.
Our commitment for the year was to hold operating expenses flat plus inflation.
We're right on track with that commitment.
For the <unk>.
Second quarter and the first half.
We show on Slide 11 operating expenses in 2020 benefited by $1.4 million PPP loan.
Excluding this benefit 2021 operating expenses would have been lower by six 5% for the second quarter and eight 6%.
And a half.
Gross margin expansion and cost management.
Through net.
And adjusted EBITDA.
Excluding the PPP loan benefit.
Net loss of $3 million in the second quarter, what hasn't been 29% better than a set period last year.
For the first half the net loss of $6.3 million or 44% improvement.
The continuous a favorable adjusted EBITDA result showed a clear picture of our progress.
With a 51% improvement in the second quarter and 63% improvement in that first half.
We believe this type of financial performance as a strong indicator for future growth.
Reduce the net loss and positive changes in working capital contributed to that 19% improvement in cash used in operations in the first half.
As Kevin noted, we continue to carefully manage both operating expenses and cash usage.
We believe that we have sufficient cash to fund our ongoing operations and support our growth prospect.
We are well positioned to deliver solid operating results.
Remainder of the year.
Spect to continue our revenue growth strong gross margin and a careful cost management to make meaningful improvement in our adjusted EBITDA and operating cash.
Our core remains unchanged and we're following a clearly defined path to reach profitability.
With that said I would like to turn the call back to Kevin <unk> for closing remarks.
Thank you Sue.
Before we go to your questions. If you would turn to slide 12, let me summarize our outlook for the remainder of the year.
We have built a strong and geographically diversified customer base combined with a broad product portfolio.
As we move into the second half of the year, we are working with our Latin American customers to prepare for their planting season, where we expect solid demand for our products.
In the northern Hemisphere, our customers are now planning for the 2022 season and as is typical for this time of year, we are gearing up to supply them.
We have a good line of sight as to product movement and to how our channel partners are positioned for the coming year.
This gives us confidence in our ability to aggressively grow sales in the second half while maintaining our strong margins.
Our cash position is solid and will continue to invest in growth, while prudently limiting discretionary spending.
We are well positioned to reach adjusted EBITDA breakeven.
And I have to give our team full credit for effectively managing through a challenging first half of the year, while keeping us on our path to profitability.
We have created a unique leadership position in sustainable agricultural solutions, and we are poised to accelerate from here.
I'd like to turn the call over to the operator now for your questions.
Operator.
Thank you at this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad again that have historically wanted to ask a question.
We have your first question from Ben Klein with Lake Street Capital markets. Your line is open.
Hello, then.
Hi, Kevin Thanks for taking my questions.
First I had a couple for you regarding a couple of one of the comments you made in your prepared remarks. When you noted that there was.
And I'm, sorry to put words in your mouth here, but something to the effect that there was revenue that you expect in Q2 that was going to get pushed into Q4 and the seed treatment side.
Firstly.
First can you quantify that at all for US and then second how should we really think about that.
It doesn't it doesn't seem to be that it's going to be revenue that can be able to be made up. It's just revenue that is it can be realized.
This season.
Would be my is my initial take but.
Maybe I'm wrong. So so can you help us understand kind of the scale of that push out and then how we really should think about whether that's revenue that's missed or revenue that's just pushed out.
Right, Yes, Ben so.
Here's the way I would characterize it so Q2 for US is very busy right. We work right up until the end of the end of the month.
Pushing sales out the door in meeting customer needs, we had a sizable PEO.
That we were anticipating getting out in Q2 that slipped into Q3.
Some of it may end up in Q4, but the way I think about it is.
We think or are forecasting the second half of the year to be more or less on track with how we've trended over the last several years in terms of our growth.
And then if you add on the Q2 to Q3 shipment in there it's going to bump it up a little bit more so we're not anticipating.
Its loss revenue been its just shifted between quarters.
Okay. So that's four.
Seed treatment for product, that's going to get planted next spring that wasn't seed treatment for product that you'd hopefully get planted in the spring of 'twenty one that's correct.
Okay.
And then second I'm wondering if you can kind of get a bit more granular here on some of the.
The especially the Covid related headwinds that you guys face I mean really what this was this a and inability to access raw materials of this.
Transportation.
That you failed to secure that.
What was that what were these headwinds exactly.
Yes, Ben so theres a few that.
I would say are noteworthy.
Certainly on the supply chain getting raw materials in our production facilities in time to meet demand had some impact.
Definitely our ability when you're launching new products to get out on farm do the demo trials do the belly to belly training with our customers was impacted as well and I'd say those are the two big ones, but I'll ask matti.
And Kevin Hammill to chime in if they have any additional commentary.
Yes. Thanks.
That's a good question I think Kevin you covered.
Most of it and as we've mentioned.
Getting the raw material ASP indefinitely.
Kevin Hammill shed some more light to it but for us basically being able to fulfill the appeals on on time, but as mentioned here I mean, Luckily majority of four and it's for planting season 'twenty two that got it.
Pushed for Q3, and then some of it also to Q4, but it's still going in the seat next year at the same time.
Kevin touched base, there I think that we.
We saw some impact from the channel.
Covid hasn't disrupted us, but there has been some countries that have been more effective than the others and some regions that have been more effective than the others and that affects the whole channel being able to do this.
Sales training, especially when you're launching new products and putting them through the channels. So.
So I think the.
The good news within all of this.
We've experienced no client churn there has been nothing fundamental.
Negative happening among our clientele are the demand for our products, but it's really really been tied up to this year and how the channel and supply chain works.
Yes.
Yes, I'll just.
Kevin Hammill, I'll add a little bit too.
And Kevin Healy I said, yes, I agree that there has been significant supply constraints this year short supply longer lead times.
Raw material price increase pressure.
<unk> talked about a little bit about some seed treatment.
Push delay for in terms of.
Selling it but not in terms of getting them on ground.
In terms of the bio protection products, which are a little bit more.
In terms of timeliness, we were able to meet all of the customer demand in second quarter. However, it took a lot of resolve from the supply chain supply chain to minimize those raw material price increases.
Also make sure that we are multi sourcing raw materials to continue production.
So as both as Kevin <unk> said, we don't anticipate.
Any supply constraints coming in the third quarter fourth quarter as we finish up this year.
Okay, Alright fair enough.
There's plenty more to talk about that's probably a good place for me to leave it. Thanks for taking my questions and I'll get back in queue.
Thanks Ben.
We have your next question from Edlin Rodriguez with Jefferies. Your line is open.
Hey, guys.
Hi, good afternoon guys.
Quick one Kevin you've talked about.
Inventory levels in the channel in Latin America can you talk about what you're seeing in all the major regions like in Germany in terms of like the inventory levels like in the channels.
The U S Latin America and Europe.
Yes, I'm going to I'll take a first crack at it and I will hand, it back over to Matti, but I'd say that our customers.
Started out in the first quarter anticipating strong demand backed by the commodity prices around the world for the major crops and.
Then I'd say in the second quarter.
And they definitely were keeping a keen eye on their inventory levels.
And then.
I would say over all for us and for our product categories in our product.
Inventories were in good shape, and we're certainly expecting strong restock in the second half of the year Matt.
Matti.
Okay. Thanks, Kevin and thanks for the question so.
I Echo what Kevin said I think what we're seeing in adherence again region by region and of course by category. So we look at seed treatment business, we see.
Some records being broken in South America in terms of planted acres. We assume also that the seat theres some drought going on so the so the.
Treated seed pressures going up so that's going to be good for for seed treatment also in Europe things are pretty stable looking at next year in terms of the.
The channel portfolio production crop protection I think that there, we're seeing slight optimism, which is driven by high commodity prices and again, depending on the region. If you look at South America for example, where we've launched some new products made big.
Partnerships recently.
Farmers have really been able to clear out some debt in the past.
Last year or so.
After the bad.
After a couple of the bad seasons that base effort. So we expect that to turn into higher demand going forward and just recently we are we are hearing some some.
Positive.
Thinking from the channels.
The life is going back on track and the vaccination programs are kicking people are meeting more more face to face, but that still doesn't mean that.
Covid is over.
Or that we would be fully back to normal but in general there is slight optimism in there.
And when it comes to inventory levels in the channel.
I don't think Thats the biggest.
Or it's not a concern at the moment, let's put it this way.
Okay. Thanks.
And I have a quick one on the seed treatment business, you're doing extremely well there like for the major oil crops.
<unk> had outside schools outside of the quarter.
How long do you think you can sustain that outperformance.
Something that can go on for the next four or five years like.
Essentially like how long you think you can sustain the outperformance in the seed treatment business.
Yes.
Great question Matti <unk>.
I'm going to hand, it to you in a second.
My quick comment is we're just scratching the surface. If you if you think about the acres that we're on with the portfolio we have.
What we have coming through our pipeline, including <unk> hundred six for our <unk> insecticides.
Plus.
I would say a robust pipeline through the pro farm line.
We see as I said, we're just getting going in terms of being on acres globally as a seed treatment matti.
This is Europe hurt and so I'll leave it to you to add further commentary thanks.
That's another great question and I think this is Seth.
Is it something that of course, we ask ourselves.
All the time, but.
At the same time, it's something that we're at.
Kevin is that we're just getting started and why we ask this question all the time that we asked at which products can we could.
On the platform of seats and I think our combined experience in the current acres that we're at is a testament to it that we're now getting that real proper footprint in the industrial seed treatment business, where element now accessing the downstream and the midstream businesses.
Through other partners, but at the same time, we're we have a pipeline of.
We're launching four new products this year.
We still have a pipeline of many more products become that we've carefully designed to a.
Be on the same.
Platform of seed treatments, so basically find the synergies between the products, but also deliver that real value to a market that is still developing so we have to at the same time remember that seed treatment as a business is relatively new and its growth.
Its outpacing growth.
I don't know what the other markets in AG.
And there is there are certain fundamental seed treatment that we understand very well how to bring products that perform at the right dose rate that are compatible with other.
Products that also can survive with the seat for two years. So you get started the seats right. So I think that gives us the credibility, but also then our ability to innovate and not just a put a BMC together.
For the next five years and really create value from from that way so sorry for the long answer.
The short answer would be that exactly as Kevin said, we're just getting started and there is some really really interesting.
Things coming up on the seed treatment side.
No. This wasn't really helpful I'll get back into queue. Thank you.
Yes.
Again, if you would like to ask a question. Please press star one on your telephone keypad again that is star one to ask a question.
Yeah.
We have your next question from Ed Lane Rod.
Rodriguez with Jefferies. Your line is open.
Yes.
One other question can you talk about like.
Please proceed.
Essentially like any one getting close to the scale.
Both the products that offer.
Trying to get a sense like how long do you think it.
It might take.
For your smaller competitors to <unk>.
Get to your level.
That is a.
Great question and my short answer is.
We spend a lot of time looking forward rather than looking in the mirror and lane. We've got a 15 year head start we have a fantastic portfolio of products already in the market commanding shelf space with our.
Distribution channel partners.
We've got a fantastic pipeline that.
As expected the deliver and bring products to the market over the coming years that will bring significant value to us so we feel.
Very comfortable in our position, we think we're uniquely positioned to retain our leadership position in the market.
And I'd say, we spend a lot of time.
<unk> thinking about how do we get on more acres.
Rather than worrying about.
The newer companies coming up and displacing us.
With that being said, though we certainly are looking to a number of these companies that are in the sector now with regard to the potential to collaborate.
As we as we recently and today announced with Terramara.
And use those technologies to help accelerate our growth. So it's kind of the way I think about I mean, we are in terms of the whole sustainable AG crop inputs crop protection market as we've talked about in seed treatment, we're just getting going and our potential to get on the untreated acre and <unk>.
Terms of our products is again absolutely phenomenal.
And that's where we're spending most of our time thinking about how do we get on more acres with our products, how do we make our products.
Better from an efficacious standpoint from an ROI standpoint.
Yeah, I think for us the opportunity remains.
Absolutely fantastic.
Okay. Thank you very much.
Thank you Lee.
We have your next question from Gerry Sweeney with Roth Capital. Your line is open.
Hey, Jerry.
Kevin.
Thanks for taking my call just a.
Easy question or potentially even I should say.
Can you bucket out maybe how much sales you lost because of some of the drought.
Which areas.
I'm curious to be able to provide.
Any of that.
Yeah.
Yeah, well I mean, the short answer Jerry is we were projecting to be in the upper twenty's growth like when we started out the year. We got a few months under our belt saw what was happening with commodity prices lots and lots of optimism out there.
So you can kind of extrapolate that we went from our previous projections to where we are today.
It was it was a tough spray year in the Western U S.
It was very hot and extremely dry.
So that.
The headwind was that we're looking at preliminary numbers coming out of California.
They are not finalized yet, but it looks like its breakers, we're down about 20%.
The good news is that our.
Spray acres were down about 14%, so we didnt suffer as much as the overall market but.
When it's hot and dry and growers are not seen fungus pressure or insect pressure I mean, they are good.
Good on them I guess to some sense in that they don't have to spend that money and spray. So good chunk of it was there were still in season, Jerry throughout the rest of the United States I mean, we're still going hard in the in the corn belt on corn and soybeans with pacesetter, we're still gone.
And even in California in the PNW, we're still.
Spring <unk>.
Lots of activity on the East coast. So we will see at the end of the day, but I would say if youre just thinking about the drought where were we impacted most versus expectations, it's definitely the worst.
Yes, Okay, that's what I suspected.
Detail on the market.
Mark it down about 20% or down 14%.
Thank you Youre welcome drew.
Again, if you would like to ask a question. Please press star one on your telephone keypad again that is star one to ask a question.
Yeah.
I am showing no further questions at this time I would now like to turn the conference back to Mr. Kevin <unk> CEO for any closing remarks.
Thank you.
Thank you everyone for joining our call. We sincerely appreciate your time and interest in MDI.
We've effectively guided the company through a number of near term external headwinds. So far this year to do so we had to make use of all the tools available to us to ensure we delivered on the bottom line.
We fully expect to return to a more aggressive growth rates and leverage our leadership position as we expand globally.
Thank you again, and we look forward to speaking with you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
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