Q1 2024 S&W Seed Co Earnings Call

Participants

Mark Herrmann; CEO; S&W Seed Company

Vanessa Baughman; Interim CFO; S&W Seed Company

Robert Blum; Managing Partner; Lytham Partners, LLC.

Ben Klieve; Analyst; Lake Street Capital Markets LLC

Presentation

Operator

Good morning, everyone, and welcome to the S&W Seed Company Reports first quarter fiscal year 2024 financial results conference call. All participants will be in a listen-only mode. (Operator Instructions) 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 Lytham Partners. Sir, you may begin.

Robert Blum

All right. Thank you very much, and thank you for joining us today to discuss S&W Seed Companies 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 our 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 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 US 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 a 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 Kermit, Chief Executive Officer for S&W Seed Company. Mark, please proceed.

Mark Herrmann

Yeah, 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 in calls, such as improved lifecycle 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 in 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 forward shipments. To that point forward 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 solution.
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 two 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 grass weeds and sorghum, which robs water, nutrients and ultimately yield from the crops. 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 grain sorghum acres in the United States at 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 void of any innovation to this point by the large agricultural companies.
In my conversations with Double Team customers since taking over as 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 trait 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 queue 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 Prestwick asset free trade for sorghum, what we previously called durian free, with a few thousand acres being planted this year. We plan on commercially launching our Prussic Acid Free trade in 2025, initially as a solo trade and then shortly after we expect to be providing a stacked trait with Double Team.
Finally, in our trait pipeline, we are developing a second generation post grass herbicide trait which we plan to launch in 2025, and in discovery stage for an insect tower resistance trait in 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 drier climate better than other crops.
Well, 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 four key countries, Mexico, Argentina, Brazil and Australia. Remember there are about $6.5 million acres in the US. This would more than double our addressable market opportunity.
In the non-US regions, we will look to align with independent seed companies with current market leading brands to maximize market penetration through licensing, S&W germ plasm and our traits. This process is underway, and while it may not be a 2024 contributor to revenue as the breeding process typically can take about two to three years 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 two weeks in Australia. A key focus in mind was to implement many of the same strategies internationally as we have in the US 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 and -- 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 a more streamlined and efficient operations.
The result of this is the closure of some underutilized facilities, which includes some headcount reduction and reinvestment into existing facilities that can accommodate more throughput at reduced overall costs. Further to this is the Australian business has reaffirmed its commitment to the forage and pass your seed 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 VBO 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 stacked herbicide. We are excited to see this development and the dividends that can be brought to developing the gambling 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's still a lot of work to be done.
Let me now turn it over to Vanessa to review the financials and detail. I'll then provide a few final words and then we can address your questions. Vanessa?

Vanessa Baughman

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 forward sales were $11.6 million compared to $14.3 million last year.
US sports sales were $2.4 million compared to $3.8 million, and sorghum sales were $2.3 million versus $1.8 million last year. Up this Double Team was a $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 non dormant alfalfa as cheaper European seed disrupted the market. We had a $1.6 million decrease in Mexico non dormant alfalfa due to wet conditions causing missed 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. sorghum sales was due to dry planting conditions.
These decreases were offset by a $1 million increase in South Africa sorghum sales from the addition of a new customer, a $0.7 million increase in alfalfa sales delivered in Q1 of 2024 that have historically been pushed into Q2 of 2024 and the previously mentioned $0.5 million increase in Double Team silicon revenue.
As Mark mentioned, we are maintaining the guidance we provided in September. With revenues 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's revenue of $73.5 million.
As a reminder, sorghum related revenues 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 Team 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 US forage operations, we see revenue of about $9 million, compared to $10.8 million last year. Now turning to margin, 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 margins was primarily driven by improved non-traded store income margin, improved non dormant alfalfa margins due to pricing in the global market and increased sales of our higher Double Team margin sorghum solution in North America.
Further, our LCM charges continued to decrease, highlighting the quality of our inventory due to better inventory lifecycle management. I do want to note that we are seeing some recent activity within the alfalfa global market of discounted feed hitting the market from certain competitors. We will look to manage our focus on maintaining strong pricing against inventory management to ensure we risk -- we achieve the best return on our invested capital.
Looking at fiscal 2024, despite the strong first quarter, we want to maintain our expectations for full year gross margins, inclusive of any LCM charges 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 two, 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 I will 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 expense. Again, this is consistent with our expectations provided in September, which calls for total operating expenses for the fiscal year to be 30 -- being $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 $4.0 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 were 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 VBO. During Q1 of this year that amounted to $0.8 million. This is a non-cash 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 VBO 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 non-cash number. And as such, we will continue to adjusted 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 our thought that we'll 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

Thank you, Vanessa. I just want to wrap up by stating that my excitement to be leading S&W today is even higher than when I took over in July. The passion and dedication from this team and their commitment to create a best in class C company across all functions is evident, especially after my recent trip to Australia.
I'm pleased with the progress we're making to drive innovation and sorghum a craft set up until S&W's recent progress was severely underserved from a technological standpoint, and therefore is right to benefit from the traits we have introduced to date in 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. Thank you for your continued support of S&W, and I look forward to taking your questions. Operator?

Question and Answer Session

Operator

Ladies and gentlemen, at this time we'll begin the question and answer session. (Operator Instructions)
Ben Klieve from Lake Street.

Ben Klieve

All right. Thanks for taking my questions. First I'd like to ask a couple on the Australian operation on your market, you noted your recent trip to Australia and making some kind of restructuring efforts down there on given that there is an ongoing strategic review of that operation does the fact that there's kind of an ongoing restructuring shifted the expected timing of news flow out of that, which was -- which had last been communicated into, kind of late calendar '23 type event.

Mark Herrmann

Yeah. Thanks, Ben. And I appreciate you being on the call with the trip down there. I would say it's consistent with what we've talked about, the evaluation of Australia opportunities to create value. One of the key opportunities is a high level of efficiency and a strong margin position.
So I was there for two weeks, Ben, and I 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've stretched across to 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's 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 as it take place.
But I think it's consistent with what we've talked about before because if you recall, it was looking at all opportunities, including in 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.

Ben Klieve

Okay, thank you. Mark, on the alfalfa business, you called out kind of increased low cost supply coming in that could impact the alfalfa business here, but for the next couple of quarters, can you elaborate a bit on this? Is this a dynamic that you're taking, maybe sustainable for kind of in the mid-term? Or is this just a kind of a short time event that can maybe just impact the business here for a couple of quarters?

Mark Herrmann

Yeah, 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 geo political 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 is actually lead 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 and 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 a below cost of production price points. So will be monitoring that. But then as you mentioned, looking at a longer term, that leaves now the alfalfa business with really only three 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 a high quality in very high valued varieties in our lineup, and we're working to maintain our pricing position on them to drive profitability versus volume plays or purely revenue plays.
But it's something that you 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.

Ben Klieve

Got it. Helpful comments, thanks mark. One more for me and then I'll get back in queue. You called out prussic free acid, I think Prussic Acid Free, excuse me, I being planted to the tune of 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 the commercial launch?

Mark Herrmann

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've positioned it as a pilot, a pilot launch, and then we'll be ramping up production as we look at next year for a 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.

Ben Klieve

Got it. Okay. That's helpful and very good. Well, good start to the year teams. I appreciate you taking my questions and I'll get back in queue.

Mark Herrmann

Great. Hey, thanks, Ben.

Operator

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

Mark Herrmann

For 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 taken significant moves also in implementing cost savings efforts. And I know for this year will only get a portion of those cost savings because they're being implemented mid-year.
As we go forward, they should be significant contributors to what Vanessa pointed out. But as we look to next year, as well, we should be moving into a cash positive or profitable our position as well. As we look at next year, they'll 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 I 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.