Q3 2021 Marrone Bio Innovations Inc Earnings Call

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Okay.

Good day, and thank you for standing by welcome to the third quarter at 2021 earnings conference call.

This time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

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Sorry zero.

I would now like to hand, the conference over to your security D. Linda Moore, Chief Legal Officer. Please go ahead ma'am.

Good afternoon, everyone and thank you for joining our call.

Welcome to the 2021 third quarter earnings conference call from Iran Bio innovations.

Our presenters today are CEO, Kevin he lash and CFO Soo Chung during the Q&A section, we will be joined by Matti T N N. Our senior Vice President of International sales.

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 $19 95 regarding management's future expectations plans.

Projections forecasts and prospects.

Certain material assumptions were applied in reaching these conclusions and 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 MD&A and elsewhere in the Companys annual report quarterly reports 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.

As COVID-19 restrictions have eased over the past several months have been fortunate enough to attend multiple meetings and events with key customers and industry peers.

In our business, whether it's always a topic of keen interest and the recent wet weather in California, and the Pacific Northwest, where certainly welcomed and is a great start to what we hope will be a normal winter in terms of precipitation in the western United States.

What's different this year. However is a hyper focus on rising expenses proceed fuel fertilizers and crop protection products.

As just two examples the price of North American fertilizer set another record late last week and top producers are signaling that prices will continue to climb.

There are also widespread shortages of key herbicides the costs of which have also ballooned.

Inventories are so tight that even growers, who are fortunate enough to have storage space on farm and the cash on hand to pay upfront may not be able to lock in their supply of certain inputs.

Everyone is experiencing supply chain challenges from basic raw materials to ocean containers and by all accounts, we will have to manage our way through this situation well into next year.

The positive side of the story is commodity prices.

In soybeans had an eight year high this spring and while they have moderated somewhat current projections are for higher net farm income in 2021, which will bode well for crop inputs input demand in 2022.

All of these factors play into a level of uncertainty as to which products distributors and growers will buy and web.

The Latin American growing season is underway and after a year of severe drought. The main growing areas of Brazil have received abundant rainfall leading to revised forecast of record planting intentions for both corn and soybeans.

The southern Hemisphere harvest in turn will affect commodity prices and planting intentions in the northern hemisphere. This spring.

In this environment, our greatest strength has been our decision to diversify.

We have the product line and equally important the distribution channel that will allow us to win whether the farmer chooses corn or soybeans.

And we can succeed in specialty crops as well as the large row crop market.

We can serve a farmer in Europe as easily as one in Argentina, and we can protect the crop from seed to leaf and.

In times of uncertainty Optionality like ours is a powerful tool.

If you would turn to slide four let me expand on how I see is positioned for the remainder of the year and into 2022.

Sue will go into the third quarter financials in a moment, but my key takeaways or this.

First our team has been remarkably resilient during this period and their dedication towards supporting our customers continues to impress me.

Second the strength of our portfolio remains a strategic advantage and has allowed us to grow sales in the double digits. Despite the headwinds we've experienced and.

Third access to the market through our channel partners provides us with outstanding opportunities to creatively position our products in all sectors as we move into the 2022 crop year.

That being said we are cautiously optimistic about successfully closing out the year.

Given current market dynamics. It is fair to assume there will be greater variability between the fourth and first quarters and therefore prudent to widen the band of expected revenue growth, which we now anticipate will be in the low double digit to mid teens range for 2021.

At roughly the midpoint of the fourth quarter, we have already booked or have purchase orders in hand for half of our targeted revenues for this period.

There is still plenty of heavy lifting to be done, but this is solid progress.

We continue to expect our product mix will deliver annual gross margins in the upper 50% range and operating expenses should remain in line with 2020 plus inflation.

As we prepare for more robust sales in 2022, we must execute on some key tactics.

First we must stay ahead of the supply chain to ensure raw materials are in place to manufacture our products without disruption.

Youll see this reflected in our balance sheet. This quarter as we are strategically building inventories in anticipation of sales needs in 2022.

We believe our manufacturing position in the United States as a competitive advantage in this environment as many of the alternatives are coming to the U S from overseas with greater delivery risk.

We intend to be the first in line to supplier biological solutions in season to fill potential gaps in the delivery of traditional products many of which are in short supply.

Second we have to be in close concert with their customers to anticipate grower demand during this dynamic environment we.

We need to have the right product with the right value proposition in the channel well ahead of time to ensure availability to maximize sales.

Third the value of our seed treatment business has never been greater.

Growers may pull back on fertilizers and crop protection products in tough times, but if theyre going to grow a crop they have to plant seeds.

Our products are applied by our seed company channel partners. So it's a near guarantee that when a grower purchases a bag of corn soybeans cotton from one of our seed partners where there.

Fourth we need to exploit the advantages of our bio Eni program as shown on slide five.

Our prescribed tank mixes have the opportunity to grow dramatically in a time of tight supply and accelerating cost.

We believe this can open new doors for us to demonstrate the tremendous benefits of our products offer.

This is a unique point in time to promote our bio unite offerings, allowing growers to stretch their dollars by using cost effective and sustainable products with the traditional active ingredients.

Strategically our plan has been validated this year, even as we dealt with external challenges on the revenue front.

The macro trend towards growing food with agenda footprint that preserves natural resources and flows climate change has not changed.

<unk> has been and continues to be at the cutting edge of meeting this need and the value of our products is being borne out in this environment.

But we can't rest on our current portfolio our market reach to succeed.

As you see on slide six further diversification is critical to accelerating our growth we've made great strides with a broader portfolio to expand our presence into a wider market and we intend to maximize these opportunities.

At the same time, we are still aggressively pursuing strategic alternatives to expand our capabilities in our core business that support the build out.

Our board and our leadership in sustainable agriculture.

While it is always challenging to find the right opportunity I'm confident we will.

At the same time, we are pushing hard on our refocused R&D pipeline.

The recent regulatory submissions for our novel insecticides in Nevada sides, MBR, three or six in the United States and <unk> in Brazil are major milestones for us.

Late stage developments and our herbicide program are giving us three different products to tap into a $27 billion market that is void of new efficacious and cost effective solutions.

Even with these advancements we can't rest on our laurels. We're also exploring opportunities that will complement and turbocharge, our R&D power to ensure we are employing the latest and greatest tools to ensure our long term success.

Having spent most of my career in the distribution side of agriculture, I am very pleased with the breadth and depth of our distribution network.

We're working with the right partners and have reached into all major markets, particularly for row crops.

I'm also confident in our manufacturing capabilities.

Our decision to invest in our Michigan manufacturing plant looked good when we made it last year and it looks even smarter in today's environment.

Strategically we are well positioned to regain our momentum and position our products for the upcoming 2022 season.

<unk> capabilities are most confident and the commitment and drive of our team to rebound from the challenges of 2021 and deliver on our full potential we offered to change the way food has grown to the benefit of our customers our shareholders and our environment.

I'd like to turn the call over to Sue now to go further into the financial results for the quarter and year to date Sue.

Thank you, Kevin and good afternoon to everyone on the call.

If you turn to slide seven.

Revenues grew 12% to $9 9 million in the third quarter.

Driven by higher sales of seed treatments and fungicide.

Our strategic is shifting to more global markets with our high value seed treatment. Once are reflected in our gross profit for both the quarter and for the first nine months.

In third quarter gross profit rose, 21% to $6 million.

Gross margins were 61, 4%.

Year to date gross profit was up 16% and gross margins were 62, 1%.

We are committed to managing our cost effectively.

And they have a target of keeping operating expenses at the same level in 2020 plus inflation.

We achieved the best again in the third quarter with operating expenses up a pinpoint find Neil in.

Essentially flat on a year over year basis.

For the first nine months of the year revenues were outpacing operating expenses.

As a result, our operating expense ratio decreased to 91% as compared to 101% in the same period of 2020.

On a comparative basis I want to remind you that 2020 operating expenses.

One time benefit of a $1 4 million from the PPP loan.

As we continue to scale our business internationally.

It's important that we have the right systems in place to support our growth.

We're investing in operating some.

Automating some back office processes.

Allow us to scale with all the increasing head count.

If there is another example of our commitment to both growth and operational efficiencies.

The combination of higher revenues and gross margins, coupled with cost management have improved our bottom line results.

Our net loss for the third quarter decreased by 18% with a loss of $4 9 million in 2021 as compared with a loss of $6 1 million at <unk>.

Third quarter last year.

For the first nine months of 2021.

Net loss was.

11, 2 million as compared with net loss of 16 million in the same period last year.

We continue to improve adjusted EBITDA.

With a 22% improvement for the third quarter and up 47% improvement for the year to date.

Continue the reduction of the net loss and the efficient working capital management.

Improved our cash flow from operations.

The use of our cash from operations.

Kris.

4% for the third quarter and 24% for the year to date.

In summary, our continued expansion into new market.

Loud us to grow revenues and improve our product mix in the face of external challenges.

Coupled with the effective cost management, we're continuing to move toward Oracle of achieving positive adjusted EBITDA.

With that said.

I'd like now turn the call back to Kevin for closing remarks.

Kevin.

Thank you Sue.

As we complete this year, we are mindful of both unique challenges before us and the opportunities they present.

We continue to believe that marrone bio is uniquely positioned to capitalize upon the growing desire by stakeholders around the world to produce safe healthy affordable food with agenda footprint and the execution of our strategy will ensure we maintain our leadership position in this sector.

With that being said I'd like to turn the call over to the operator for your questions operator.

Thank you Sir as a reminder to ask a question you will need to.

Press Star one on your telephone.

Julie a question you May press the pound key.

Please standby, while we compile the Q&A roster.

And speakers, we have our first question from Gerry Sweeney of Roth capital.

Ask your question.

Good afternoon, Kevin <unk>, Thanks for taking my call question Gerry.

Sure.

Wanted to start with just with the supply chain, obviously lots about it I'm.

Curious if this is more.

For an issue of marron, maybe acquiring raw materials to produce or is this more of an issue getting product out to.

For your distribution channel.

Is it hitting any other any one particular products in particular or is it spread across the entire portfolio.

Yes, Jerry Great question, I mean, there's been a lot of talk about supply chain.

In the news everywhere no matter if you are.

We're in Europe, or South America, North America from our standpoint.

It's a little bit all over if you think about the inbound the manufacturing and the outbound to our customer.

But I would say that our supply chain team has done an absolutely fantastic job in managing the situation, we've significantly expanded our vendor list two suppliers to everything from sweeteners too.

Total lids to pilots and then in terms of on the outside Gerry outbound.

We're continuously looking for new transportation logistics partners as well to ensure we're able to get wheels underwear products and get them delivered to farm. So.

The short answer to your question is it's a little bit on the inside in the inbound and it's a little bit on the outbound, but again, we feel that were met.

Managing the situation.

Quite well.

In spite of.

Everything going on around us.

Got it and then.

The follow up to that would be obviously.

Disruptive conditions here, but sometimes theres opportunity alright. Thank you touched upon it in your remarks just about.

Yes.

Agricultural commodity chemicals across the board.

Our stressed is this an opportunity for you to get some of your.

Products into the market a little sooner maybe people adopt the products a little faster than people that normally hadn't planned on using some biologicals moving into that market.

Faster adoption rate have you seen any inkling or sense of that.

Jerry that's a great question, we certainly do see this as an opportunity.

There is a lot of worry in the marketplace about getting the traditional products on farm.

On time.

We're getting them at all and certainly by us having our manufacturing facility in Michigan and in Europe.

We're close to the market, we've got competitively priced products and it's a great opportunity as we mentioned for our bio unite strategy to be deployed whereby we can increase our participation in a growers program.

And not only provide them with great products, but also help them extend the acres that they can cover with their traditional chemistry or or traditional crop protection products. So we're certainly looking at it as an opportunity and as I mentioned in my opening remarks, it will be an area of focus for us going into 2022 and beyond.

Okay, Great I'll jump back on Adam.

I appreciate it thank you thanks Gerry.

Our next question from Laurence Alexander of Jefferies. You May ask your question.

Hi, Lawrence Hi, there can you help on two fronts one in terms of the international expansion.

How much can you give us any detail on.

Geographies or product categories, where youre seeing demand coal.

Our particular tracks and how much of this is cross selling the same application.

Were you validate them in the U S to the same crops or you're going into different crops.

Prudent different market relevance.

Sure.

And then the second one is.

Any kind of field trials.

Our key data out of that most recent season.

That would have materially changed how you look at the ranking of the products in your R&D pipeline.

Great. Thanks, Laurence good to hear from you again.

I have matti on the phone with me, our senior Vice President of International So I will turn.

The question over to him in a minute so in terms of the question.

Where are we expanding geographically.

Our core markets continue to be North America, Europe, and Latin America, not to say that we're not.

Doing work and others I would call those are core.

And I'll, let Matt talk about how things are going in those markets in a second but in terms of yes. A great question about are we able to leverage our knowledge and experience from our field trials in the markets that we're currently into move outside so the knowledge that we've gained in Europe. The knowledge that we've gained in north.

American can we deploy that into Latin America. The short answer is yes, certainly we're going into those markets and new market with a significant amount of knowledge in terms of how our products work what crops. They work on.

What type of an application protocols should you have so it really is a tremendous benefit for us to help fast forward, our commercialization of our products that certainly helps with the registration.

From a registration standpoint.

Setting up our field trials, and then demonstrating the effectiveness of our products.

In terms of answering your last question have we seen anything in our field trial data that's changing our ranking.

I would say actually Laurence the opposite buy.

By what we've seen this year.

It is <unk>.

Convincing us even more that we're on the right path, we've got fantastic products, they're absolutely do an amazing.

Showing amazing performance in the field.

We are really getting hitting the mark with our data locally as well because that's always the case that you have to build the case local and then prove the efficacy and that's what we've been able to do and even in some cases to the extent that we're extremely competitive from from all points of view.

And the local market so.

That is a price per se, but it's something that we were really expecting once we've now delivered that data and submitted for example, two of six dose here in Brazil, now, which we expect the registration for the latter part of 'twenty three I think that's going to be an exciting one definitely and then in Europe.

Building up also with the upcoming.

Submissions.

And thanks for the the first question as well I think I'm, just trying to break it down to to try to make it short and sweet because there was there were so many good aspects and its really touching the point of our international expansion and the breakthrough moment that we're having there.

Geographically as Kevin mentioned, we're really looking at North America, but then internationally, we're focused on Europe, and South America as.

As well as parts of Africa, and what we are seeing today's.

First we've covered ground on the seed treatment hardware already on over 25 million acres, but starting from next year were seeing a new ground, where we're actually starting to dominate the seat space. So we're having more than one product on the same seat and this is our promise to deliver more and more value to sort of seed and all the way through to a grower.

So we can really develop technologies that complement each other and bring value to the channel and I think thats, an exciting benchmark that we're having more than one product on the seed.

Going into the market.

Now in terms of crops and products.

Now keeping up with your segmentation from the Great question, we launched three new products this year.

In Europe alone and in these four into plant health and Biosimilar sector and that answers also to the other question. So the pull that we see is is equal so there's a great need for biopesticide feed.

Europe, or South America, or Africa, but the regular regulatory timelines that we've been working through diligently and we have a great regulatory and.

Department working on these details, but it's still going to take a bit more.

Longer time than it does with plant health and Biosimilars. So what we have to offer as a company is really something valuable from the plant health and Biosimilars perspective to really address the market and then build on our portfolio, so that future pipeline by bringing dose bio pesticides.

Again, taking one step back so on the crop side, we've been working a lot with with corn seed treatment, we've been working with corn sunflower oilseed rape soybean, but also we've broken through into the cereals market in Europe. This year with the with the launch of Y impact product a downstream serial <unk>.

Seed treatment product in Europe that we also expect to rollover to North American markets and also South American markets on top of that we have to premium product launches. This year, mainly targeted for corn that we also expect to to carrier.

Great performance.

So great value throughout the whole.

Paul Channel.

So.

On top of this looking at the.

The pipeline from our Biopesticide portfolio underneath Europe, and South America are at the leading.

CAGR.

Growers and biologicals, we have a great pipeline in the regulatory side and submissions and also then in partners that we've selected for these products and then go to market plan. So so are our medium and long term plans are really well covered from from these loans. So all in all it's a really.

Well balanced.

Makes both short medium and long term there is grateful and we can offer something in the short term medium term and long term, but if I would have to highlight something from.

From this quarter as we launched.

Our new seed treatment product with Russo Baxter in Argentina, and the plant has the biosimilar side.

We launched a new cereals seed treatment product in Europe.

Also going to crossover to to North America, which is by far the largest seeded crops.

And then we have this premium product launches also on the seed treatment side. So so.

I think we're pretty well laid out for the for the breakthrough here.

And could you help me with just one I don't know if there is a simple way to characterize this pause.

If you think about sort of the.

Applications you have in your R&D pipeline and the potential deeper touches.

If you had a customer.

Hmm.

World Cup, one day, and just decided they absolutely loved your entire portfolio and used everything to the maximum of its potential.

What would be kind of the revenue per acre or kind.

Kind of how can we think about what the revenue opportunity you might be at a farmer.

<unk> your portfolio is the cat's meow.

Hey.

Lawrence.

That's a very interesting question.

And not to be raised but I will say that it depends on the crop.

And so if we're looking at high end specialty.

Where you do multiple sprays during.

During a season versus let's say Matti was talking about wheat cereals as an example.

It will be quite different.

But.

It's a question that.

We'll dig into a bit more and come back to you on but.

I think.

If I think about.

What percentage of the acres, we're on today, even with the growers that are with us in terms of.

What the potential is.

We're not even scratching the surface Laurence right. So, but that's a good question, we'll come back on that one to you and give you a better answer.

Thank you.

And and further announcements.

To Kevin's 0.1 that I think that our <unk> strategy as well.

Exactly to Kevin's point, we're scratching the surface, but I think thats. The thats. The vehicle that is also taking us towards.

The bigger budget when the growers thinking allocating the resources in terms of what the what the inputs are but buying an IDE and the performance of our products really puts them outside of that in a biological budget or that speciality budget that growers, who used to have and puts it puts us into the main budget. So I think that not only are we are scratching the surface but.

We are also.

We have the ability to be allocated to the main budget issued made from a grower standpoint.

Yourselves easier to buy or do business with <unk> got it right. Okay.

Okay. Thank you thanks.

Thanks Laurence.

And our speakers. Our next question from Ben <unk> of Lake Street Capital You May ask your question.

And then alright.

Hey, good afternoon, Kevin and thanks for taking my questions I've got a couple on the quarter and then one on the R&D side. So first on the quarter and kind of the conditions you guys are facing now, particularly around the drought.

My first question is the second quarter headwinds that you saw that were drought related.

Did you see any of the kind of loss business in the quarter.

Get pushed into the third quarter or maybe end of the fourth quarter.

To be realized or is the business that.

Really just wasn't able to be realized because of the drought is that has that proven to be gone.

Yes, Ben.

We think about it.

It works is that you only have that one one time, a spray that acre right I mean, so if you lose the spring.

Let's just say for example in an orchard youre going to spread to three four times. If you Miss one of those spreads that will make it up later right. So.

When it's gone it's gone but.

We still have a very resilient business I mean, we're looking at our order book and the enthusiasm of our customers.

They are already planning for 2022.

They're talking to us about how do we load up the channel to ensure we've got the product in place.

Making sure that we've got programs.

That meet the needs of the growers to ensure.

They are also participating all the way through from now until when they need the product so.

Yes, we can't go back and re spray that acre Ben to answer your question, but certainly the mindset today is.

The spring of 2021 is behind Us and we're looking forward to 2022.

Got it and then that leads into my next question is let's say that drought conditions continue into next year.

What if anything are you guys doing internally here to kind of prepare for.

For repeat conditions.

If anything can be done.

Well, it's certainly been we're starting with planning for what we consider to be a normal season right. So we're planning for success, we're getting our product positioned we're working with our customers as I mentioned on marketing programs.

We are putting a lot more horsepower this year into our <unk> program to ensure that people understand how a biological can fit into a standard practice, whether you are an organic farmer, obviously, who is using our products today, but a conventional farmer how does it work how would you employ.

A product like ours into Europe.

Program.

And then in terms of.

Dampening the impact.

Of any specific weather event, whether it's in North America, Europe, or Latin America, we continue to expand our portfolio in terms of our product line. We are expanding our footprint in terms of the markets, we're serving and we're expanding our product portfolio as we mentioned in specific.

<unk> and <unk> treatment so.

We're trying we're not trying we are.

Expanding the footprint and the diversity of this company. So that we're not heavily reliant upon one particular market for major amount of our success going forward.

Got it got it very helpful. I know you've been doing that for a while and it's a great success.

Wish you continued success on that front.

What condition that had been seen by you guys over the last couple of weeks out there continue here in the next year.

Another question on the R&D side.

Talked a lot about.

About this already but I'd like to maybe dive into the herbicide.

The herbicide portfolio that you have from the bio bio herbicide seem to be the Holy Grail on the biological space and I'm curious kind of what.

What needs to happen for those I believe three different products between now and commercialization, you're referring to kind of formulation improvement.

But I'm really wondering kind of what steps need to take place before you before you believe you're going to be able to bring those products to market.

Yes, Greg Great question Ben.

I can say that everybody in this company.

Extremely excited about our herbicide platform. So you are right we have three.

We have two that are posting merchant and we have one that is pre and post emergent which.

We believe is a very unique product that has both characteristics that you can imply it before.

We'd show up and also after the weeds are growing in the field in terms of what do we need to do there is always work here Ben in terms of.

Improving our formulation and increasing the concentration but two of them.

I'd say very close to.

Getting into a point, where we believe we can have our first commercial launch it may not be at the final end point, where we can say look we're going to go from everything from almonds strawberries, all the way to wheat.

But certainly getting a product out there that does fit in some of the higher end markets broader bigger higher end markets, we think we're making great strides.

And I'd say.

As we continue to work with these products and put more of our attention on their work with some of our collaboration partners on the chemistry and formulation.

Yes, we had we'd say we have a clear line of sight to.

Getting these products to market. These are in a pipe dream and theyre not far back in the in the R&D shop. These are active in real.

And we're getting very encouraging results out of the lab and in some of our real world trials as well.

Perfect. If you don't mind, a follow up to that can you can you elaborate kind of on where on where.

That portfolio stands.

In terms of field trials.

Kind of very narrow field trials or have you done kind of broad based trial.

Really validate the technology on a wider scale in the field.

Well, then I would say that it is part of the herbicide program as part of our extensive field trial.

Program.

We've tested it ourself, we've also tested it in conjunction with some of our channel partners.

And some third party collaborators so.

If you think about.

Where we're putting the vast majority of the Davis research team.

Our focus right now it's on this on this program. The herbicide program. It's not to mean, we don't have other products that we're working on as we do.

But if you're if you're walking around saying what is marron bio focusing on out of Davis right now now that we have the $3 six.

Product out and within the hands of the EPA, we're putting a significant amount of horsepower behind a herbicide platform.

Got it got it very interesting well look forward to more updates on that.

Thanks for taking my questions I'll get back in queue. Thanks, Ben.

And as a reminder, if you would like to ask a question you will need to press star one on your telephone.

Once again star one on your telephone.

Okay.

And as there are no further questions at this time I will now turn the call over back to Kevin He lash CEO for closing comments.

Thank you operator.

As we complete this year and move into the 2022 growing season, we need to deliver on for near term tactics with long term strategic benefits.

First we have to ensure our products are in the distribution channel and available on demand to our customers.

Second we must be opportunistic to take advantage of disruptions in the marketplace.

Third we have to build on the momentum of our seed treatment offerings globally and fourth we must maximize our presence on farm by leveraging our <unk> program. Our strategy remains sound and we have the wherewithal to executed to the advantage of all of our stakeholders. Thank.

Thank you again, everybody and we look forward to speaking with you in the near future.

This concludes today's conference call. Thank you all for participating you may now disconnect.

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