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Edited Transcript of SANW earnings conference call or presentation 9-May-19 3:00pm GMT

Q3 2019 S&W Seed Co Earnings Call

May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of S&W Seed Co earnings conference call or presentation Thursday, May 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark W. Wong

S&W Seed Company - CEO, President & Director

* Matthew K. Szot

S&W Seed Company - Executive VP of Finance & Administration, CFO, Treasurer and Corporate Secretary

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Conference Call Participants

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* Benjamin David Klieve

National Securities Corporation, Research Division - Analyst

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Sarkis Sherbetchyan

B. Riley FBR, Inc., Research Division - Associate Analyst

* Robert A. Blum

Lytham Partners, LLC - Managing Partner

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the S&W Seed Company Reports Third Quarter Fiscal Year 2019 Financial Results Conference Call. (Operator Instructions) Please also note that this event is being recorded.

And I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead with your presentation.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [2]

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Thank you so much, and thank you for joining us today to discuss the financial results for S&W Seed company for the third quarter of fiscal year 2019 ended March 31, 2019.

With us on the call representing the company today are Mark Wong, President and Chief Executive Officer; and Matthew Szot, Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question-and-answer session.

Before I begin with prepared remarks, we submit for the record the following statement. 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, 2018 and other filings made by the company with the Securities and Exchange Commission.

With that said, let me turn the call over to Mark Wong, Chief Executive Officer for S&W Seed Company. Mark?

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Mark W. Wong, S&W Seed Company - CEO, President & Director [3]

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Thank you very much. Good morning, everyone on the call today. I'd like to spend my time talking to you a little bit about -- and giving you an update on our new organization and then spend maybe a little bit of time on the Chromatin acquisition and give you a report on how we're doing with that asset.

So as all of you know, this is a very busy time for Seed Company. That's really why we have a June fiscal year because farmers in the northern hemisphere are planting in April and May and, in some cases, June, and so we are very busy getting seed out to our customers and fine-tuning sort of all of the different product offerings that we have in the marketplace.

So let me touch a little bit on an update on the Chromatin acquisition. The -- as you remember from prior calls, Chromatin was a unique and important acquisition for S&W because it allowed us to move towards diversification of our crop focus. So as I've been saying now for the 1.5 that I've been CEO of the company, we're moving from alfalfa into other crops, not because we don't like alfalfa, but we think there's also opportunity in other crops. We continue to push stevia. And through the Chromatin acquisition, we now have a significant portion of our sales, maybe 17% or so, in this fiscal year in sorghum -- grain sorghum and forage sorghums.

The Chromatin acquisition was a very, very difficult one. And I just want people to understand that it really was -- the difficulty was in 2 different areas. One was the acquisition of the company itself. Remember that it was a state-run bankruptcy, and the bank who had the revolving credit line had to foreclose to get control of the asset. And so an auction was held, and we and one other company were invited to bid on the asset. We prevailed over the competitive company, which was a European company, about 12x bigger than we were. So that was a significant win on our part. And we got the asset for what I consider to be a very, very affordable price, maybe we paid $0.30 to $0.35 on the dollar for the asset, the assets that we acquired. And remember that major assets in the company were the germplasm and product line in sorghum -- grain sorghum, the marketing network in the U.S., the marketing networks that existed internationally in the company and a really nice production plant and breeding location down in Texas.

So it's great to buy things at a good price, but then of course, you have to earn a return on those assets, or maybe the price that you thought the asset was worth really wasn't as good as you thought. So we've been focused on making sure that the Chromatin acquisition as we thought would add to the operations of S&W. And remember, we acquired a lot more employees. We increased our employee pool by about 80%, 85% when we acquired Chromatin, and those people were spread all around the world. So it was a difficult thing to integrate everyone into one company.

Remember also that Chromatin had a huge history of losses in the last couple of years, over $30 million in EBITDA losses each of the last 2 years before we bought the company. And so as I've said in prior calls, one of the key issues for S&W was to make sure that those losses did not survive the acquisition. We cannot afford to have EBITDA losses from the companies that we buy. They need to be accretive to our earnings. That's important criteria for management and the Board of S&W, and it's something that we take absolutely seriously.

So the Chromatin deal, I'm happy to announce, and we're sort of into the big sale season. Approximately $15 million of sales that we expected in sorghum is going to be around that number. Our control of expenses has been excellent. We're within 5% of the expected overall expenses that we forecasted for the business. We cut a huge amount of expenses out of the company in various places all around the world, and we will be in the 2019 year EBITDA or a small contribution to EBITDA at S&W once it's consolidated into our 2019 results.

So we're incredibly happy. We consider ourselves skillful but a little lucky, frankly, that we've made such great progress with Chromatin. But I think it says something about our organization, that we have the financial structure to understand these kind of complicated deals, that we have the deal expertise to get them done and we have the operating expertise to run them and integrate it into our company and achieve the goals that we set for ourselves when we do the acquisition analysis and our Board and management go forward on trying to acquire these kind of companies.

So I'm very, very happy to report on that. I'd like to put that in the context of our new organization, which, as I said on our last call, we put into place immediately after the Chromatin acquisition was made. So as you remember from our past Board call -- excuse me, investor call, we refocused reorganization in 2 different markets. So we have the Americas, which includes the United States; and Mexico and Argentina, the other 2 big markets for sorghum and alfalfa. We're looking at Brazil. Brazil obviously is a big soybean and corn production area, and we will have to sort of more information for all of you in the next couple of quarters about that.

But the major market in the Americas is clearly the United States of America. I am happy to report that the sales are good in that market, and we are doing the work that needs to be done in terms of improving our distribution system. One of the themes that I've said in past calls is that we have to get closer to the farmer. We are trying to do that with new dealer and distributor agreements, but more importantly, with our farmer-dealer network that we got with the Chromatin acquisition. Chromatin did not have a lot of cash. And so as you might surmise or guess, the farmer-dealer network was left a little bit under-invested over the last couple of years. And so we've made a big effort to look at all of the territories to realign them, along where the new acreage lies in alfalfa and sorghum. We've integrated the S&W and Chromatin sales forces. We've had one -- we only have one sales force now in the U.S., and we've had our first sales meeting. We're in the process of delineating plant in each of those territories and doing analysis to help our sales reps with their bigger customers and sort of key points based on our product line of how to sell to those key customers. So we're pretty happy with the progress. It's going to continue on until the 2020 year. Hopefully, by the spring of plantings next year, we'll see some effects and some growth in our unit sales from our farmer-dealer network.

The other thing that we're doing is really, which may not be very obvious, but which could see companies do is we're organizing ourselves so that we can focus our R&D around the world. And so the U.S. management staff had responsibilities for alfalfa worldwide R&D and production and sorghum worldwide R&D and production and the international markets under David Callachor, have responsibility for the R&D in sunflower and the worldwide production of sunflower. So we've tried to delineate those crop functions where the markets are the most important so that our people with the most knowledge can make the best decisions about what kind of breeding we do, what kind of products are coming to our pipeline, what our product life cycle should look like, how aggressive should we be on inventory, what do we do with the parental seed for each of those varieties or hybrids that we're producing. The seed business is a very complicated business, and it's a business made with small decisions that have to be made correctly if the big results in terms of sales and earning are going to happen.

So we're pretty happy with all of those. We've added a VP of Sales and Marketing, a guy named [Mike Heed], who came from Pioneer DuPont and a few other seed companies. And we've added VP of R&D, Steve Calhoun, who came from Bayer Monsanto and has been with BASF. So these are guys who have a long history in the seed industry and know the strategies for improving market penetration and sales and have the skill sets to do the blocking and tackling. So we're pretty happy with all of how that is going. Clearly, we're happy with adding 2 senior people to our Americas organization.

On the gene front, just to touch on that briefly. We're still pursuing our forage quality effort in alfalfa and our herbicide tolerance effort in sorghum that we acquired with the acquisition of Chromatin. Remember that, that herbicide resistance is ACCA, which is a herbicide class, that, we believe, will have a functional value that we can charge our customers for in grain sorghum.

On the stevia side, we have moved the breeding operations to Tifton, Georgia and have hired a gentleman, Dr. Jeff Klingenberg, who we've known from past experience in the seed industry. He's now running that program, and we have a big trial going on with our beverage partner looking at stevia and basically working on the different kind of stevianoids and what the sort of taste profiles of those products look like. So we're pretty happy to move that. We think that the southeast with its humid weather is a much better production area for stevia than where we were trying to grow it before in California. And we have got a big cloning operation going down there with the third parties, and we'll be planting a crop here in the next couple of months and harvesting that off in the fall to run our taste trial.

On the international side, again, we're focused really on sunflower. And just remember, in the 2019 budget, we are approximately 78% alfalfa, 17% sorghum and 2% sunflower. So that really is a marker for the kind of maturity in each of those crops. So obviously, in the dormant and nondormant alfalfa business, that's a very mature business. Remember, we bought that breeding program from Pioneer. And it's a long-decade, long-breeding program storied in its quality, its disease resistance and those kind of things. And that is our most mature crop for all markets around the world. Sorghum is a crop that we're developing. Obviously, we got breeding programs from the Chromatin acquisition approximately 6 months ago, but those programs have been run by Chromatin for 5 or 6 years, so they're on the verge of putting out products. And in sunflower, we're concentrating on Eastern Europe, where most of the acreage is. And our breeding program is there. And David Callachor has added a couple of senior business leads, one in Europe and one in Asia, and those -- the gentleman who's the European guy will also be overseeing our sunflower breeding and product development operations. He has some sunflower experience as well as a lot of seed experience.

So we're pretty happy with how all of that is happening internationally as well as in the U.S. We continue to follow the couple of themes that I have talked about before. One is getting closer to our customers. We always look at distribution companies that are in the seed industry. We also look at new crops. Sometimes they're forage crops. Sometimes they're alive to the forage sector. But we've got a couple of acquisitions that we're considering in the international markets and one additional acquisition in the U.S. that we're looking at.

International had a bit of a setback in 2 markets, in Sudan because of a military coup and in Zimbabwe because the wrong President got elected. We dropped about $8 million to $9 million in sales because we couldn't get dollar-denominated contracts to make our sales. So that was a bit of a setback for us. But we think, in general, as you'll hear from Matt, that we're pretty close to the guidance that we sort of talked to you all about in past calls.

Remember also that internationally, South Africa is very important to us. We have 2 JVs there. One was a JV that S&W started with a partner who we have known for many, many decades in South Africa called -- the JV is called SeedVision. And the other, Sorghum Solutions, is a JV that was part of the Chromatin acquisition. We weren't sure that we would be able to hold on to both of those relationships, but it looks like everybody sees benefit in working with us. So we're pretty pleased to have the access of those good partners in SeedVision and Sorghum Solutions. Africa is a very, very important continent for sorghum. Most of the worldwide acres are actually in Africa. Although, they're subsistence acres in the sense that they're low value seed open-pollinated, not hybrid acres, and most of the output from that production is used as a human food supply, not fed to animals or made into ethanol or anything like that like it is in the U.S.

So we're pleased with how things are going both in the Americas and internationally. We're very pleased with how our integration with Chromatin has progressed, and we think that the market should take some confidence that when we look at an acquisition and we project which is our hurdle rate sort of mid-teen returns that we have a chance obviously to achieve that.

So with that, I will turn over the discussion to Matt Szot, who will go through the financial part of our presentation today. And obviously, at the conclusion of that, we would be happy to take questions. Matt, I'll turn it over to you.

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Matthew K. Szot, S&W Seed Company - Executive VP of Finance & Administration, CFO, Treasurer and Corporate Secretary [4]

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Thank you, Mark, and thanks to everyone on the call today.

As we discussed last quarter, we adopted accounting standard ASC 606 on July 1, 2018, and that impacts the timing of when we recognize revenue from our agreements with Pioneer but not the total amount recognized during our fiscal year. It's really an acceleration which shifted Pioneer revenues to the first half of our fiscal year. We've provided additional disclosure in our press release to further clarify the impact of ASC 606, so that there can be better compatibility of the current financial results to prior fiscal periods. I'm going to walk through this in additional detail and encourage you to ask questions if there's a need to further clarify.

On a reported basis, which includes the impact of ASC 606, revenue for the third quarter was $18.2 million compared to $22.9 million in the third quarter of the prior year. Had we reported under the same accounting standard as last year, revenue would have been $22.8 million in the third quarter of 2019. As we mentioned in our press release, we recognized $5.2 million of revenues in the contribution of Chromatin during Q3. If we exclude the impact of the accounting standard change as well the contribution from Chromatin and look at our business on an organic basis, revenue would have been $17.6 million for the third quarter. Now taking this a step further, if you exclude both the revenue to Pioneer and the recent acquisition and look at the remainder of the business, revenues were up approximately 20% over the same period of the prior year, which is encouraging.

As we look to the first 9 months of the year on a reported basis, which includes the impact of ASC 606, revenue for the first 9 months was $62.9 million compared to $54.2 million for the first 9 months of the prior year. Had we reported under the same accounting standards as last year, revenue for the first 9 months of 2019 would have been $56.5 million. Now when we exclude the impact from the change in accounting standard as well as the impact from the Chromatin acquisition and Pioneer revenues, we grew revenue on an organic basis by 12% for the first 9 months of the year. This improvement is primarily coming from a modest rebound in Saudi and growth in our business in Australia.

As we discussed during our previous conference call, we closed on our Chromatin acquisition on October 25, and therefore, we'll have approximately 8 months of financial activity in 2019 from this business. We'd now expect the newly acquired business to generate approximately $15 million of revenue in fiscal 2019, which is at the high end of our range of the previous guidance given of $14 million to $15 million. In addition, we expect the newly acquired business to generate positive EBITDA in FY '19, which is an improvement from our prior expectations of roughly breakeven EBITDA.

Now turning to gross margins. Gross margins during the third quarter of 2019 were 26.3% compared to 29% in the third quarter of the prior year. Gross margins during the first 9 months of '19 were 23.8% compared to 25.2% in the first 9 months of 2018. The decrease in gross profit margins was primarily due to product sales mix. Now as we've talked about in the past, the sales pricing under our production agreements with Pioneer, which expires later this month, is lower in 2019 than in the prior year. And once again as a reminder, we're expecting gross margins from our newly acquired sorghum operations to be higher than our historical operations. We are currently estimating that the newly acquired operations will generate gross margins ranging from 30% to 40% depending on specific hybrid.

Now moving to operating expenses. Adjusted operating expenses were $7.4 million in the third quarter fiscal 2019 compared to $4.6 million in the third quarter of the prior year. As we mentioned in our press release, the increase in operating expenses for the third quarter of 2019 can be attributed to approximately $1.8 million of additional expenses from the newly acquired operations, coupled with approximately $1 million of additional investments in our sales and marketing and product development functions.

Now we went through some of this data last quarter, but I'd like to clarify that including our Chromatin operations, we expect SG&A to be approximately $15.1 million for the full year in fiscal 2019 and $15.3 million in fiscal 2020. This excludes transaction costs but is inclusive of stock-based compensation. Research and development is expected to be approximately $6.5 million in total for FY '19 and $7.2 million in FY '20. And lastly, depreciation and amortization is expected to be approximately $4.4 million in 2019 and $5.1 million in FY '20.

Adjusted EBITDA for the third quarter of fiscal 2019 was a $1.2 million loss compared to $3.1 million of positive EBITDA in the third quarter the prior year. Adjusted EBITDA for the first nine months of fiscal 2019 was $700,000 compared to $3.7 million in the first 9 months of fiscal 2018. A complete reconciliation of this is available in our press release.

As we discussed last quarter, we are expecting a positive adjusted EBITDA contribution in 2020 from the Chromatin operations, and I'm happy to report that now based on the progress to date on integrating the Chromatin acquisition, we now expect positive EBITDA contribution in fiscal 2019 from Chromatin. And as Mark mentioned, please keep in mind, this is really substantial progress given the scale of Chromatin losses prior to our acquisition.

On the inventory front, we are making measured progress in better aligning our seed inventory balances with our sales demand. And as we've discussed over the last several quarters, we are carrying higher levels of alfalfa inventory this year. We planted very few new acres for crop year 2019 and plan this will take a similar approach for the next production season for alfalfa. Accordingly, we expect the alfalfa seed production volumes for the upcoming harvest to continue to decrease, and we expect our inventory balances to further decrease in the coming periods and become more in line with historical carrying levels. As these inventory levels come down, this is going to translate to significant improvements in our operating cash flows. But now as we look at our sorghum inventory levels, we are in a different position. So when we acquired the Chromatin act -- when we acquired the Chromatin business, we assumed production decisions made before we took control, and naturally a concern of ours was whether our hybrid supplies would match up with demand. So at this stage, we are pleased to report that we are expecting to end the current fiscal year with minimal carryover levels of sorghum, which is a positive sign, and we are going to be increasing production levels of sorghum to meet anticipated growth in the coming months.

I know we went through a bit longer here due to the change in accounting standards as well as the acquisition, but I want to make sure everyone had a clear understanding.

As Mark talked about, we're really pleased with the significant progress accomplished with the Chromatin integration, and we believe this business will become progressively accretive in the years to come. We're showing organic growth in this segment of our business that we have the most control over, and we're laser-focused on driving growth and efficiencies in all segments of our business.

So I'm going to turn it back over to Mark.

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Mark W. Wong, S&W Seed Company - CEO, President & Director [5]

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Thank you, Matt. That's a great financial summary for the last quarter and year-to-date. Thank you very much for that. And as Matt said and how I'll conclude my comments today is just to say, we're very pleased with the organic growth that we're seeing. As Matt said, we think that the Chromatin acquisition will be more and more accretive as we are able to build sales and profits on the assets of the acquisition. And we're feeling optimistic that the future is going to be very bright for the company, and because of that, we're looking at some acquisitions in addition to the internal growth that Matt is reporting in our base business.

And with that, I'll take -- Matt and I will take questions. Operator, I turn it over to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first questioner will be Sarkis Sherbetchyan with B. Riley.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [2]

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So nice to see the Chromatin acquisition kind of ahead of schedule here right from a EBITDA contribution perspective. Would you be at liberty to discuss kind of what you expect the EBITDA contribution to be for fiscal '19 from Chromatin?

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Matthew K. Szot, S&W Seed Company - Executive VP of Finance & Administration, CFO, Treasurer and Corporate Secretary [3]

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Sarkis, it's still a moving number, and we're going to have more clarity as we move through the final portion of the sales season here, which really is quite active at the moment. But yes, that could range anywhere from $200,000 to $800,000 positive EBITDA. But in the coming weeks, we'll have more clarity on that, and we can -- the next time we talk, we can provide further clarification of how those numbers are shaking off.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [4]

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That's fair. And I think just to kind of frame it. You expect to do about $15 million in top line, and you're kind of getting positive contribution. I think the number that you had outlined for next fiscal year was between $17 million to $20 million of top line contribution from Chromatin. So should we assume next year would be materially kind of profitable from an EBITDA perspective?

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Matthew K. Szot, S&W Seed Company - Executive VP of Finance & Administration, CFO, Treasurer and Corporate Secretary [5]

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Well, we're certainly expecting FY '20, where we're going to be demonstrating, not only top line growth that you just mentioned, Sarkis, but we're certainly expecting growth at the EBITDA contribution level as well. That could be over time. We're thinking that, that will be in excess of 10% EBITDA margins. But in FY '20, there is still going to be time for us to take advantage of the efficiencies. So we'll see a ramp and continued improvements to those EBITDA ratios for several years to come. That's what we're expecting.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [6]

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Understood. And if I can move on quickly. I think the production agreement with Pioneer regarding the GMO varieties expires by the end of this month, any updates on kind of the negotiations or just kind of what your expectations are going forward?

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Mark W. Wong, S&W Seed Company - CEO, President & Director [7]

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Sarkis, I think we're still in the midst of those production discussions, and we don't really have an update at this point. But remember, I'll just remind you that it was a originally a 2-year contract, and the second year was quite a bit smaller in revenue just because that was the natural production cycle for the GMO alfalfa. So the second year is not as important to us as the first year was in terms of sales volume.

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Operator [8]

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And our next questioner today will be Ben Klieve with National Securities Corporation.

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Benjamin David Klieve, National Securities Corporation, Research Division - Analyst [9]

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First question on the Pioneer contributions for this year. I mean that high $30 million range is in excess of what I think kind of was expected on a full year basis a few quarters ago. And would you mind breaking down kind of what the drivers are behind that number and really what has been better than maybe what your expectations were a few quarters ago?

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Mark W. Wong, S&W Seed Company - CEO, President & Director [10]

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Yes. Sure, Ben. It's a good question. I mean everybody, I think, has been watching the news and with sort of instant information. Sometimes it's difficult to make sort of mental comparisons of what's happening this year versus what's happening in prior years in the farming sector. But basically, there's been huge amounts of rains. There's been lots of flooding. There's been lots of crop land under water.

And the part that you don't hear is there was a small week-or-so time frame, where there was very cold temperatures in the northern corn belt this year -- this winter, and that was before there was snow cover. So what you'd like to see is it's no first, no access insulation. And then when the temperature goes below freezing, the alfalfa is protected. Remember, alfalfa is a perennial crop, so it has to live through the winter. So we and Pioneer both feel like there was this week of very cold temperatures, and that there was a lot of it in the industry vernaculars called winter kill, right?

So the crop wasn't protected by snow. A lot of the lot being -- we're not exactly sure, but a lot more than normal of the alfalfa acres may have had frost damage or winter kill and need to be replanted. And so Pioneer is gearing up for that because seed is planted very quickly. You have to have it in the hands of the farmers when the demand is there or someone else will get the sale. And so Pioneer has asked us to produce and sell to them additional products that they're ready for this potential replanting in the northern corn belt for alfalfa. So that's where it's coming from.

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Benjamin David Klieve, National Securities Corporation, Research Division - Analyst [11]

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Got it. That's very helpful, Mark. I think -- so maybe -- did -- I want to make sure I heard you right. Did you say that there was sales slippage from Sudan and Zimbabwe of $8 million to $9 million in the quarter. Did I hear that right?

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Mark W. Wong, S&W Seed Company - CEO, President & Director [12]

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Yes, that was our expected order levels. So we had 2 firm orders that were real -- and we had supply. So we were -- it was just predicated on getting the proper dollar-denominated documentation. And in those 2 countries with the political upheaval, we weren't able to get dollar-denominated transactions so we lost the sales.

So I think, Ben, if you're giving us sort of a half pat on the back that sales could have been a lot higher, I think -- thank you for the half pat on the back. We believe that the $8 million to $9 million was a real number. And yes, we were obviously distraught not to get it. But I think it shows the power of our international organization and that these kind of sales in the market are out there and that our people know how to get those kind of sales. And yes, they have higher political risks than in some developed markets, and that's what eventually brought the sale down and why we're not booking it.

But there'll be good news and bad news in those markets in the future. And -- but we think the engine is firing on 8 cylinders and that our guys that are out there turning over rocks, and we're pretty pleased with that. So thank you for the half pat on the back, but we are sorry we didn't actually book the $8 million to $9 million in sales. That would have obviously increased our results significantly.

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Benjamin David Klieve, National Securities Corporation, Research Division - Analyst [13]

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Yes, well, and I guess a quick follow-up to that. It sounds like the way that you just phrased it that you don't think that these are sales that are going to be pushed to the right by a quarter or even a year that these are -- that those have come and gone.

And then as a second follow-up on that. The Sudan sales, I'm assuming, at the end of the day, those are going to be -- that's going to be exported to the Saudi markets. Do you have any sense that that's the same for Zimbabwe sales? I mean that's a hell of a long way from Saudi. Is that -- do you think that, that is the end market for that product? Or is there another variable driving that business?

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Mark W. Wong, S&W Seed Company - CEO, President & Director [14]

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Yes. So there are little bit different situations. The Zimbabwe situation was actually a sorghum -- a sunflower sales, excuse me. And the -- our 2 joint ventures, 1 of our -- in South Africa, 1 of our joint venture partners was working with us to get that sale. So that was kind of directly aligned and linked to our 2 JVs in South Africa. We think that, that sale is still available for the 2020 spring planting, so we will be obviously going after that again. So that may come to fruition in 2020.

The situation in the Sudan is much more complicated. So there was a military coup. They put half the businessmen in the country in jail. Our distributor was clearly affected by all that. The dairy industry in Saudi was hoping to get alfalfa production, so this was an alfalfa sale, from the Sudan. And now that the Sudan is sort of upside down politically, it's not clear whether the Saudis will -- what the Saudis reaction will be, whether there'll be actually a government change in policy to allow the dairies to maybe bridge the political gap in the Sudan with production in Saudi or just what the situation is going to be. So we're looking at that again. We think that the markets in the Sudan because they do have water and they're pretty -- the government policy in the North Sudan is to support the dairy industry in Saudi Arabia with alfalfa production.

So we think there's a lot of reasons for those alfalfa sales to maybe happen in 2020. But given the political situation and the fact that the banks are all jammed up and there's no hard currency, we're not sure whether that's going to be a real sale in 2020 that we can ship and book in dollars, or whether there'll be seed companies willing to take more risk and sell through that market than we are willing to take.

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Benjamin David Klieve, National Securities Corporation, Research Division - Analyst [15]

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Got it. Mark, that's -- it's very helpful. One more for me, and I'll get back in queue here. I'm wondering if you could comment a bit on -- just kind of the overall state of the domestic dairy market. I mean there's been a good couple months for milk prices. Seen some reports that the herd is coming down a bit. I'm curious if you kind of view the state of the market right now, at least, just having some signs of stability and kind of what your outlook is over the next, say, 12 months for kind of the supply/demand balance for alfalfa within the dairy market.

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Mark W. Wong, S&W Seed Company - CEO, President & Director [16]

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Yes, that's excellent question. And if I probably knew the answer to that, I'd be doing something in the futures market, Ben. I'm only the CEO, and I'm proud to be of a very energetic and hopefully appealing seed -- middle market seed company. I -- but I've been in the dairy business. I'm being -- I'm playing with you a little bit. I don't know what the heck is going to happen. Yes, lots of dairies are going broke. Capacity is coming out in terms of number of cows, but it's a very interesting business like a lot of U.S. businesses. Once the small guys go out and the big guys have a higher percentage of the market, usually the amount of milk per cow per day, which is the sort of common measure of how high the cow can jump, the amount of milk per cow per day starts going up for the big dairies, right? And they get more efficient, and so the actual volume of milk produced does not go down as much as the number of cows taken out of the herd.

So it's hard to know. It's a worldwide market, and the New Zealand milk producers have a lot to say with that. The Australian milk industries also had some problems over the last 3 or 4 years. It's not just the U.S. problem. The worldwide milk markets are under some pressure. So it's -- we watch it obviously because it's incredibly important, super important to us. But man, I got to go to graduate school or something to get smart enough to answer your question, which was an excellent one. That's my opinion. But I can't tell you when it's going to turn or if it's going to turn.

The problem is on the demand side, right? So the problem is the demand side. Demand is going down 2% to 4% a year just because milk is less -- milk from cows is less popular and some of the markets being taken by vegetable milks. So it's difficult to really figure out where that trend is going and when it's going to turn to the point when the dairy industry is profitable again.

And cheese, which, for a while, made up from the surplus of liquid milk, really -- they're sort of also sort of maxing out. There's a lot of cheese in government storage, and we don't really think that that's much of a place where a lot of milk can go in the short term, at least.

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Operator [17]

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(Operator Instructions) And our next questioner will be Gerry Sweeney with Roth Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [18]

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Just a little bit of a follow-up on the Sudan and Zimbabwe. I think you said $8 million to $9 million that you didn't get. Was that factored into your projections for this year? And how does this sort of flow through into the fourth quarter?

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Mark W. Wong, S&W Seed Company - CEO, President & Director [19]

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Yes. I mean so we risk-weight all of our sales projections. So it was clearly in our sales projections but weighted at a fairly low percentage success rate, right, which is the accumulation on our part of the -- the sale was booked in the sense it was a contract. But yes, we also rank the sales by the probability of hard currency and all those kind of things. Because in some of these markets, they are difficult to get.

So yes, I mean it was in our sales projection but at a low number. So the full effect of the $8 million to $9 million did not hit the sales projection numbers. But yes, we were hoping that we would have some happy news for the market that was even better than what we've reported. So even without those sales, we're saying sales are good this year. And as I explained the alfalfa situation in the U.S. with the fleas and replant, there's a big reason for that.

Remember, I've said in past calls that we have to have more shots on goal, right? So that means lots of different markets and a few different crops because you can't be good in 10 crops. We're not that bigger company. But for 3 or 4 crops like alfalfa, sorghum, sunflower and stevia is kind of a special situation because we're not marketing that as our product yet.

We have to be in those places because stuff happens in agriculture, right? The weather is out there, and there's political risk in these markets. And sometimes, you get lucky, and you have a good year, and everything sort of works, and your horse finishes first and then doesn't get disqualified. And sometimes, it's not so good. So we were way too narrow a company before in the sense that we have one crop and it was alfalfa, and it was focused on a couple of markets that were important to us. And so as you all painfully know and as we painfully know in the Saudi situation, it was a terrible result for us. The government making this change of policy on water use. And we just can't afford to have that many eggs in one basket anymore. And that's the reason why we're trying to delist the company by adding crops and going to multiple markets.

You get -- you don't have control of all these things. Sometimes you get lucky, sometimes you don't. Obviously, you have to work hard and do all the work and have people who are qualified to get the sales. But part of your sales are always weather-related or political risk-related when you're in some of the markets that we're in.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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Got it. Okay. And then just on the acquisition front. I mean can you give us any ideas of what you're looking at even if it's sort of broad strokes?

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Mark W. Wong, S&W Seed Company - CEO, President & Director [21]

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Sure. The first thing to say is that we're very, very cognizant of the fact that we need to earn a return with the assets that we have and that our shareholders are concerned with our level of EBITDA and with the dilution that going to the market would bring if we raise new equity. So while we're looking for acquisitions, that we were being very, very careful. They really have to have a potentially high return in terms of return on investment, and they have to strategically fulfill what we deem to be a significant need.

So we are looking at some distribution companies around the world. We do think that getting better market information because we're closer to the farmer is a weakness of S&W that we are bent to improve and correct. And we are looking at some alive species in crops, right, so crops that are basically that are current sales force and sell with incrementally small additions of costs. Those are important to us.

And so it's sort of like if I make a parallel to the pharmaceutical industry, it costs you so much to send a sales rep and to see a bunch of doctors. And if you have one product, you divide that cost by one. But if you have 3 or 4 products, you divide that by 3 or 4. And that's exactly the same kind of philosophy that we have. That's what's forced the foundation in the pharma business and in the ag business. There's consolidation also, and we think that's one of the reasons. It's that the efficiency of sales and distribution has really improved when you can sell multiple products to the same customer.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [22]

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Got it. That makes sense. This is more for Matt. SG&A, you said $15.1 million for FY '19. I missed FY '20. Could you...

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Matthew K. Szot, S&W Seed Company - Executive VP of Finance & Administration, CFO, Treasurer and Corporate Secretary [23]

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Yes, Gerry. We're expecting a small tick-up from the $15.1 million, so we guide into $15.3 million for SG&A.

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Operator [24]

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And the next question today will be a follow-up from Sarkis Sherbetchyan with B. Riley.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [25]

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Just wanted to touch on the political landscape, specifically tariffs and all the talk going on with the U.S.-China relationship. How does that hurt or help the company going forward?

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Mark W. Wong, S&W Seed Company - CEO, President & Director [26]

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Yes. I mean that's a real problem for U.S. agriculture, Sarkis. It's not just the S&W or not even just the seed industry, right? China is a giant importer and user of commodities from the U.S. Clearly, the larger crops like corn and soybeans, but also cotton and a lot of sorghum goes to China. So it's a problem.

Our farmer customers say Trump needs to get this figured out. The amount of payments that the government through the farm bill is making to farmers are not a significant part of the losses that these non-sales of commodities to China are. And so it's a significant problem.

The only issue, the only -- sort of our thinking on that, Sarkis, is just that if we have 2 equal opportunities, 1 sort of in Australia and 1 in the U.S., our 2 home markets, right now we're a little bit bending towards the Australian opportunity just because we think it gets us out of the reach of this China-U. S. sort of punch-in-the-nose export sort of issue in ag and -- so we are sort of trying to give political weight to non-U. S. opportunities. And Australia is our second home market. It's not obviously a big -- as big a market as the U.S. clearly by multiples. And it does have different weather and soils that we try to understand, and so it has different crops that they try to use and different production methods and stuff. Australia historically has been a feed animal market. So whether in the early days of Australia with sheep, or now there's a lot of beef being raised in the northern part of the country, which is really a continent. There's, we think, real opportunity in Australia also in addition to the U.S. And so we tend to give in this political environment between the U.S. and China a little bit heavier favoritism towards opportunities outside the U.S. And if they're in Australia, that's a real benefit.

But it's a problem. I mean you raised the question. It's a tough problem, Trump. I don't know what the solution is, but Trump needs to get this done. It's hurting agriculture.

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Operator [27]

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And this will conclude our question-and-answer session. I would like to turn the conference back over to Mark Wong for any closing remarks.

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Mark W. Wong, S&W Seed Company - CEO, President & Director [28]

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Thanks very much, operator. Thank you all for being on the call today.

We're very pleased with the progress that Chromatin has made in the 2019 fiscal year. I'm not going to repeat sort of Matt's and my high points, but we have now a much bigger organization with a lot of different markets and crops. We think we're on the verge of showing real organic growth, as Matt has pointed out, sort of in this past year in the sort of 12% range. But hopefully, we can keep that going in the next couple years. And we're pretty happy guys with how the company is performing, how our employees are doing and the quality of our management team. And we think the best news, frankly, is ahead for the company, and we're excited to come to work every day and make that happen.

So thanks, everybody, for being on the call today. Appreciate your interest in S&W.

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Operator [29]

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And the conference has now concluded. Thank you all for attending today's presentation, and you may now disconnect your lines.