S&W Seed Co

NASDAQ:SANW

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, everyone, and welcome to the S&W Seed Company Reports First Quarter Fiscal Year 2024 Financial Results Conference Call. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Robert Blum, with Lisan Partners. Sir, you may begin.

[Robert Blum, executive]

All right. Thank you very much, and thank you for joining us today to discuss S&W Seed Company's First Quarter Fiscal Year 2024 financial results for the quarter ended September 30, 2023. With us on the call representing the company today are Mark Herrmann, Chief Executive Officer; and Vanessa Baughman, the company's Interim Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question-and-answer session. Before we begin with the prepared remarks, please note that statements made by the management team of S&W Seed Company during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 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, results or strategies and are generally preceded by words such as may, 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 in the forward-looking statements as a result of various factors and other risks identified in the company's 10-K for the fiscal year ended June 30, 2023, and other filings subsequently made by the company with the Securities and Exchange Commission. In addition, to supplement S&W's financial results reported in accordance with U.S. generally accepted accounting principles or GAAP, S&W will be discussing adjusted EBITDA on this call. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP measure and are not prepared under any comprehensive set of accounting rules or principles. A description of adjusted EBITDA and reconciliations of historical adjusted EBITDA to net loss are included at the end of S&W's earnings release issued earlier today, which has been posted on the Investor Relations page of S&W's website. An audio recording and webcast replay for today's conference call will also be available online on the company's Investor Relations page. With that said, let me turn the call over to Mark Herrmann, Chief Executive Officer for S&W C Company. Mark, please proceed.

[Mark Herrmann, executive]

Yes. Thank you, Robert, and good morning to all of you. As this call comes on the heels of our year-end conference call that took place about 45 days ago. I'll keep my comments today a bit more brief than I did the last quarter, but I'm certainly available to expand on any details during our Q&A session of today's call. At a high level, we made solid progress during the first quarter, instituting key operational initiatives to drive the business towards profitability in the near term, including the initiative that I laid out on the year-end call, such as improved life cycle management to reduce obsolescence costs, the rationalization of certain low-margin forage product lines and seed treatments, suspension of our Stevia development program and the overall Seed manufacturing cost reduction plan. These initiatives, along with early sales of DT and higher margin alfalfa sales resulted in a gross profit margin of 30.5%, which is 780 basis point improvement compared to a year ago first quarter and a $0.2 million improvement in our adjusted EBITDA. As most of you know, the first quarter of our fiscal year, which ends in September, is seasonally one of our smallest quarters, consisting primarily of forage shipments. To that point, forage revenues were approximately 86% of the revenues during the first quarter. Given the strong progress made during the first quarter, particularly on the gross margin front, I believe the stage is well set for continued improvement throughout the year, especially during later quarters of the fiscal 2024 when we ramp up shipments of our double-team Sorghum Solutions. Our focus as a management team has been to define our business strategies with financial targets that will be delivered based on operational effectiveness by optimizing our 2 key areas of focus, our Sorghum Technology Solutions and forage products. To that point, the result of first quarter fall within our expectations and support the annual guidance that we provided during our year-end call. Vanessa will expand in more detail on the numbers momentarily. Beyond our focus on operational excellence to align S&W with best-in-class seed industry standards within both sorghum and forage product lines, we are making continued developmental progress to build off that momentum of our first trait technology solution, Double Team grain sorghum. As most of you know, Double Team is truly special and unique product as the only product available to control grassy weeds in sorghum, which robs water, nutrients, and ultimately yield from the crop. Since its limited launch in 2021 and broader commercial launch in calendar year 2022, Double Team grain sorghum accounts for what we estimate to be 6% of all green sorghum acres in the United States today and believe we will grow to more than 10% next calendar year based on demand for the product. This is not only a tremendous achievement for our sales team, but also highlights the value and demand for innovation in this critical crop, which has been a void of any innovation to this point by the large agricultural companies. In my conversations with Double Team customers since taking over his CEO, the response has been universally positive. As I have said in the past, corn soybeans, and cotton growers have all benefited from research investments in advanced tools for weed control technologies. However, sorghum simply has not benefited to this point from innovation despite being the fifth-largest cereal crop globally, S&W is ideally positioned to benefit from this. While we ensure we execute on our fiscal 2024 sales objectives for Double Team grain sorghum, remember, we are expecting total sorghum trade revenue to be between $11.5 million to $14 million, which would represent an increase of 77% to 115% compared to fiscal 2023. We are also looking to continually innovate with sorghum through the introduction of new traits. First in the Q is the expansion of Double Team weed control system being introduced in forage sorghum with initial sales expected this year. Early demand has been strong, and we expect it to sell out of its inventory this year and continue on a penetration curve similar to what we have already seen with Double Team grain sorghum. Second, we are set to commence a pilot launch of our prussic acid-free trait for sorghum. What we previously called dhurrin-free, with a few thousand acres being planted this year. We plan on commercially launching our prussic acid-free trait in 2025, initially as a solo trade and then shortly after, we expect to be providing a stack trait with Double Team. Finally, in our trade pipeline, we are developing a second-generation post-grass herbicide trade, which we plan to launch in 2025 and in discovery stage for an insect-tolerant resistance trade and a broad-spectrum herbicide trait as well. We are clearly becoming the key technology provider in sorghum, a key global crop that can be used as a substitute for many of the grains on the market today due to its key nutrient profile and ability to handle higher temperatures and dryer climates better than other crops. While our focus today is on driving sales of these traits through our S&W-owned Sorghum Partners brand and through partners with domestic independent seed companies, we remain focused on the international expansion of our traits as well. As I mentioned last quarter, there are approximately 8.7 million acres of sorghum being grown in 4 key countries: Mexico, Argentina, Brazil, and Australia. Remember, there are about 6.5 million acres in the U.S. So this would more than double our addressable market opportunity. In these non-U.S. regions, we will look to align with independent seed companies with current market-leading brands to maximize market penetration through licensing S&W germplasm and/or traits. This process is underway. And while it may not be a 2024 contributor to revenue as the breeding process typically can take about 2 to 3 years, it is a long-term growth and valuation creation driver for us that we are focused on executing with. Within our forage operations, I recently came back from spending 2 weeks in Australia. A key focus of mine was to implement many of the same strategies internationally as we have in the U.S. to drive growth and efficiencies in this segment. Specifically, we are looking to optimize our production capabilities to drive down cost of goods sold, while developing a sales and marketing approach that highlights the benefit of our forage solutions around the world. One of the key elements of this strategy is to remain tightly focused on the core drivers of profit, which is both Australian domestic alfalfa sales and also export alfalfa sales into MENA region. To help support this strategy, the Australian business has begun the process of rightsizing its supply chain footprint into more streamlined and efficient operations. The result of this is the closure of some underutilized facilities, which include some headcount reduction and reinvestment into existing facilities that can accommodate more throughput at reduced overall cost. Further to this is the Australian business has reaffirmed its commitment to the forage and passers portfolio and is making sure all product categories now align with this affirmation. As a quick update to our partnership with Shell for renewable biofuels, you may have seen the press release they issued announcing that BBO and Adama, one of the world's leading crop protection companies entered into a joint development agreement to bring to market a suite of new crop protection solutions for Camelina growers. As a background, Adama is also partnered with our Double Team sorghum cropping solution with their first-act herbicide. We are excited to see this development and the dividends that can be brought to developing the Camelina industry and to VBO farmer customers. As I hope you took away from the last call and this one as well, we are keenly focused on operationally becoming the best-in-class C company. Every organizational decision we make is data-driven to ensure it will have a positive impact on our customers and shareholders going forward. We have instilled increased engagement with the finance team and financial analysis with all decisions that impact cost, margin, cash management. The operational initiatives we have instituted are geared to drive the business towards both customer satisfaction and allow for shareholder value creation in the both near and long term. I am pleased with the results of the first quarter, particularly on gross margin improvement, but we know there is still a lot of work to be done. Let me now turn it over to Vanessa to review the financials in detail. I'll then provide a few final words, and then we can address your questions. Vanessa?

[Vanessa Baughman, executive]

Thank you, Mark. Good morning to everyone on the call today. Let me run through the details of the quarter, starting with revenue. Total revenue for Q1 2024 was $16.4 million compared to $19.9 million in Q1 of last year. Breaking it down further, international forage sales were $11.6 million compared to $14.3 million last year. U.S. forage sales were $2.4 million compared to $3.8 million and sorghum sales were $2.3 million versus $1.8 million last year. Of this, Double Team was $0.5 million in sales versus having basically no sales in Q1 of the prior year. As Mark said, fiscal Q1 is primarily a forage quarter. Looking at it geographically, we saw a $2.9 million decrease in MENA as we maintained our decision to not discount nondormant alfalfa as cheaper European see disrupted the market. We had a $1.6 million decrease in Mexico nondormant alfalfa due to wet conditions causing mass planting. We also had a $0.7 million decrease in Asia due to prior year logistical challenges related to COVID using inventory carryover into fiscal 2024, leading to lost sales. And a $0.4 million decrease in Australia sort sales was due to dry planting conditions. These decreases were offset by a $1 million increase in South Africa sort sales from the addition of a new customer, a $0.7 million increase in alfalfa sales delivered in Q1 of 2024 that had historically been pushed into Q2 of 2024, and the previously mentioned 0.5million increase in Double Team sorghum revenue. As Mark mentioned, we are maintaining the guidance we provided in September, with revenue for fiscal year 2024 expected to be between $76 million and $82 million, which represents an expected increase of $2.5 million to $8.5 million compared to fiscal 2023 revenue of $73.5 million. As a reminder, Sorghum-related revenue is expected to be between $22 million and $23 million in total compared to $18.5 million in fiscal 2023. Within sorghum, we are anticipating double teen sales to be $11.5 million to $14 million, an increase of 77% to 115% compared to fiscal 2023. On the international side, we are expecting revenue to be $45 million to $50 million compared to $43.6 million in fiscal 2023. And finally, on the U.S. forage operations, we see revenue of about $9 million compared to $10.8 million last year. Now turning to margins. GAAP gross margins for the first quarter of fiscal '24 were 30.5% compared to 22.7% in the first quarter of fiscal 2023. The improvement in GAAP gross margin was primarily driven by improved nontraded sorghum margins, improved nondormant alfalfa margins due to pricing in the global market, and increased sales of a higher double teen margin sorghum solution in North America. Further, our LCM charges continue to decrease, highlighting the quality of our inventory due to better inventory life cycle management. I do want to note that we are seeing some recent activity within the alfalfa global market of discounted seed hitting the market from certain competitors. We will look to manage our focus on maintaining strong pricing against inventory management to ensure we achieve the best return on our invested capital. Looking to fiscal 2024, despite the strong first quarter, we want to maintain our expectations for full-year gross margins, inclusive of any LCM charges to be between 24% and 26%. Remember, this compares to 19.8% in fiscal 2023. To the extent that we have more clarity on the alfalfa market in the coming quarter or 2, we will look at any potential needs to revise these expectations, but we believe we have taken a rather conservative view to account for these factors. Now we'll transition to operating expenses. Operating expenses for the first quarter were $7.9 million, which is consistent with the first quarter of last year. Breaking it down a bit, we saw a $0.4 million improvement from R&D expenses and a $0.3 million improvement in depreciation and amortization. This was offset by a $0.7 million increase in selling, general and administrative expenses. Again, this is consistent with our expectations provided in September, which calls for total operating expenses for the fiscal year to be $32.5 million, which is inclusive of depreciation and amortization. Now to EBITDA. Adjusted EBITDA for Q1 2024 was a negative $1.4 million compared to adjusted EBITDA of negative $1.6 million in Q1 of fiscal 2023, an improvement of $0.2 million. A full reconciliation is available in the press release. Again, we are maintaining our guidance for fiscal 2024 of negative adjusted EBITDA to be between negative $7.5 million to negative $4 million. This would represent an improvement of approximately $2 million to $5.5 million compared to fiscal 2023. Finally, on the net income line. GAAP net loss for Q1 fiscal 2024 was a negative $6 million or a negative $0.14 per basic and diluted share compared to GAAP net loss of negative $4.5 million or a negative $0.11 per basic and diluted share in Q1 of the last fiscal year. As discussed in previous calls, we will incur a loss of equity method due to our interest in DLF. During Q1 of this year, that amounted to $0.8 million. This is a noncash expense to S&W. We have provided a reconciliation in our press release, not only for adjusted EBITDA, but for non-GAAP adjusted net losses as well. Mark touched upon this last quarter, but just to confirm, the partnership remains on track with initial grain production to be carried out later this calendar year on the more than 7,000 acres of Camelina planted. Shell is expected to buy all of the grain that DLF produces through the offtake agreement that is in place and therefore, we will see some level of adjustment to this in our equity method number in the future. That said, it will be similarly a noncash number. And as such, we will continue to adjust it out in our adjusted EBITDA and adjusted net income calculation. As we also discussed last quarter, we are scheduled to receive a $6 million payment from Shell in February of 2024. Despite our negative adjusted EBITDA expectations, which translates rather closely to our cash utilization, the payment from Shell is expected to cover any cash operating needs this year. Beyond fiscal 2024 is we're able to continue the growth in our sorghum technology portfolio and achieve the benefits of the stability and cost containment initiatives across the remaining parts of the organization, it is on a thought that will be in a positive cash flow position in the near future. Again, I am happy to follow up with any questions or any of the details we went through. With that, let me turn the call back over to Mark.

[Mark Herrmann, executive]

Thank you, Vanessa. I just want to wrap up by stating that my excitement to be leading S&W today is even higher than what I took over in July. The passion and dedication from this team and their commitment to create a best-in-class company across all functions as evident, especially after my recent trip to Australia. I'm pleased with the progress we're making to drive innovation in sorghum, a crop set up until S&W's recent progress was severely underserved from a technological standpoint, and therefore, is ripe to benefit from the traits we have introduced to date and plan to introduce in the future. We look forward to making continued commercial and development progress throughout fiscal 2024 with a laser focus on operating S&W with best-in-class practices from top to bottom. I thank you for your continued support of S&W, and I look forward to taking your questions. Operator?

[Operator]

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Ben Klieve from Lake Street.

[Benjamin Klieve, analyst]

First, I'd like to ask a couple on the Australian operation. Mark, you noted your recent trip to Australia and making some kind of restructuring efforts down there. Given that there's an ongoing strategic review of that operation does the fact that there is kind of an ongoing restructuring shift the expected timing of news flow out of that, which had last been communicated as a kind of late calendar '23 type event?

[Mark Herrmann, executive]

With the trip down there, I would say it's consistent with what we've talked about, the evaluation of Australia of opportunities to create value. And one of the key opportunities is a high level of efficiency and strong margin position. So I was there for 2 weeks, Ben, and traveled to every site with the exception of our minor position with Triangle Research station. But the others, every one of them, we had a visit, which is significant miles as you stretch across Australia. There's opportunities been regardless of any other turn. As I look at the Australia business, there was a lot of businesses acquired or several and brought together, but it seems like there was a lot of opportunity in actually looking at the new organization and putting plans in place to highly streamline those as it looks at all facilities, all team members, how it works together. And as I traveled with Cameron Henley, who is the lead for Australia, he's got a strong handle on opportunities for efficiencies, improvement of profitability that we are going to be moving forward with. And we'll have announcements as we go through the year of what those actions are as they take place. But I think it's consistent with what was talked about before because as if you recall, it was looking at all opportunities, including and probably primarily needs to be how to run the business highly efficiently and effectively that drives contribution to gross profit and to overall company profits going forward.

[Benjamin Klieve, analyst]

Okay. On the Alfalfa business, you called out kind of increased low-cost supply coming in that could impact the alfalfa business here for the next several quarters. Can you elaborate a bit on this? Is this a dynamic that you're thinking may be sustainable for kind of at least the midterm? Or is this a kind of a short-time event that could maybe just impact the business here for a couple of quarters?

[Mark Herrmann, executive]

Yes. And it's definitely something we'll continue to watch. But as you heard with even our call last quarter, we talked about the fact that we have derisked our guidance based on concerns with the MENA geography, right, which obviously for the geopolitical pressures have not, by any means, lessened over recent weeks or months. So we've seen some volume shift in the alfalfa of missed orders that would be pretty typical in a time period, but the orders and the quality of orders that we have filled in the alfalfa market, we have not participated in the low price, low margin position, which has actually led to better profits and better margins, which is positive and a mindset as we go forward. The alfalfa business has shifted significantly over recent years. So I'm sure the individuals on the call are all aware that Corteva has again exited the alfalfa business, selling a portion of the germplasm in varieties as well as a portion of the inventory to DLF. But that also leaves the ones that weren't acquired by DLF still in question as to what happens with those products and what happens with that volume. So there's clearly at least a short-term risk that margins get cut as some of those volumes potentially go out at below-cost-of-production price points. So we'll be monitoring that. But then as you mentioned, looking at a longer term, that leaves now the alfalfa business with really only 3 major players in it, S&W being one, and no multinational significant player with now Corteva again, exiting alfalfa. So it could actually offer more stability longer term to that marketplace. So it's something we're going to monitor very, very closely. We've chosen not to participate in the low margin. We've got high quality and very high-valued varieties in our lineup, and we're working to maintain our pricing position on them to drive profitability versus versus volume place or is purely revenue plays. But it's something we going to have to monitor both for the region and then also for the change in the alfalfa market in general, but I see the longer-term change signaling more positive future than not, but the short term having potentially some volumes out there that could drive margins down.

[Benjamin Klieve, analyst]

One more for me and then I'll get back in queue. You called out prussic-free acid -- excuse me, prussic acid-free, excuse me, being planned to be between several thousand acres this year. Can you characterize that level of acreage, how much you have earmarked for kind of ongoing R&D or testing type uses versus inventory build for ahead of the commercial launch? Yes. We really didn't build any plan for production for just inventory build for next year because we can build that into a production plan as we look forward right now for next year sales, for '25 sales. So really, all the volume that is being targeted for production this year was either going to be for broader grazing trials, customer views as well as testing pieces, which is why we positioned it as a pilot launch. And then we'll be ramping up production as we look at next year for broad farm, broad-acre launch as we move forward. And it is a technology, particularly in the forage sorghum side, we're really excited to see come forward. And it also offers us a stacking opportunity to quickly add DT and prussic acid-free to forage sorghum, which I think will continue to add to the product value to farmers as well as the margin opportunity for S&W.

[Operator]

[Operator Instructions]. Ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over to management for any closing remarks.

[Mark Herrmann, executive]

Well, one, I appreciate everybody joining. But I didn't get a question on it, but as we were going through the conversation, I thought a point that maybe could have been brought up. The leadership team at S&W are taking significant moves also in implementing cost savings efforts. And I know for this year, we'll only get a portion of those cost savings because they're being implemented midyear. As we go forward, there should be significant contributors to what Vanessa pointed out that as we look to next year as well, we should be moving into a cash-positive or profitable position as well. As we look at next year, there will be full-year contributors to our overall results, which we're also very excited about moving forward. But again, I want to really thank everybody for joining the call and look forward to ongoing discussions as we move forward.

[Operator]

Ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.