Federico Trucco: Thanks for joining, and great question. This is kind of a recent development. So we still don’t have probably a full picture. We believe that there’s been a little bit of a contradictory aspect to sort of the ambition of reduction in the European Union and how that sort of resulted in changes in the regulatory framework to try to help technology developers like us, provide solutions that will go or be aligned to that ambition. So, I think even though there was a significant ambition, we weren’t able to see material changes in the regulatory process that would allow us to fast track, time to market for our existing solutions. So now, if those ambitions are being re-evaluated, we don’t know what that might imply in terms of the sort of perpetual hope that we have to have a more straightforward regulatory process in Europe.
It’s — might relieve some of the pressure from the existing participants on replacing their chemistries. On the other hand, that’s kind of a very well-established consumer demand. So we don’t know that, it will change the appetite for biologicals. There might be no regulatory driver early on, but in terms of our existing collaborations and our processes in Europe, we continue to do things the same way we were doing before this more recent development.
Bobby Burleson: Understood. And then I’m curious just with the wet weather in California, I’m based in California and it seems to be raining all the time, I’m wondering what the outlook is for pest pressure? You talked about pest pressure in other regions picking up given weather dynamics. I’m curious, what you’re expecting here in California?
Enrique Lopez Lecube: Robbie, this is Enrique. Thanks for joining us and for the question. Yes, I mean, you’re in California as well. We’re actually doing this call from California today. So we’re here as well. We’re seeing the rain coming. It’s relieving to see California in this kind of like weather. So, yes, I think that we are preparing ourselves for what should be a rather normal to good sort of season here. We have the products in place. We’ve been sort of like implementing changes on the sales and marketing teams. So we are preparing ourselves for what should be very reasonable to good season here in California.
Bobby Burleson: Okay. Great. How does that contrast with what you’ve seen in the past? Since you’ve owned some Marrone business, is this potentially a better season than you’ve had since owning Marrone?
Enrique Lopez Lecube: Yeas, for sure. I mean, on the weather side, for sure. Then I think that the overall environment with interest rates and sort of like distributors trying to minimize inventory holds, that’s probably different to what Marrone had in the past. Maybe two or three years ago, there was a completely different context. Having said that, the fact that, we sort of like are a rather small participant yet in the market is something that makes us feel enthusiastic. We don’t feel, as Federico mentioned, such a big pressure as other players from de-stocking or higher interest rates. So I think that that part of the market is different to what Marrone used to have in the past. The last two years have been tough on the weather side.
So there are some pros and cons, but overall, I think that the market is there. We have the products and we have better teams. So we should be able to target sort of the type of growth that we see for this type of technologies and portfolio.
Bobby Burleson: Okay. Great. Congratulations on the strong results.
Operator: The next question comes from the line of Brian Wright with Roth MKM, please proceed.
Brian Wright: Thanks, good afternoon and congrats. I wanted to just delve into the into the evaluation effects with was that a net negative on the overall net income line?
Enrique Lopez Lecube: Brian, this is Enrique. Well, I mean, we described that in the press release. So what I would say is that from a cash perspective, like I mentioned, we had some hedging gains. So let me take a step back. On the revenue front and the gross profit front, our business is isolated from whatever happens with the local currency, just because we operate in U.S. dollars. So there’s no effect there. It’s neutral, whatever happens with the local currency. Then there are some cost benefits on the SG&A line. It’s not something that was primarily driving the cost effectiveness that we had, but it does help. It’s sort of like a tailwind. And then on the financial line, because we hedge all of our activities, we did have some gains on the financial results line.
I would say that, there’s an accounting part that is related to the depreciation of the local currency, that is the accrual of a one-time deferred tax liability, that if you take a look at the earnings release, you will see that there’s an $8 million income tax accrual that is disproportionate to the earnings that we made. And that’s essentially related to how IFRS treats depreciation of local currency and potential gains on inventories. There are gains that we will realize in time. But we had to make that a tax accrual. So that’s an accounting sort of accrual. It’s not cash. On the cash front, the impact from the depreciation of the local currency was actually something positive to us.
Brian Wright: Okay. So, to think about it, because I’m just trying to bridge the operating profit benefit right versus in growth year-over-year versus the net income and so it really is this tax dynamic that’s the biggest driver, so like, if I were to try and derive a adjusted EPS number would I just use the normalized tax rate?
Enrique Lopez Lecube: Yes, you could use a normalized tax rate, and I don’t have the exact number with me right now, but I think that from the income tax that we are reporting in the quarter, there are about $5 million that are related to this deferred tax liability, and they’re not exactly and directly related to the profits that we made in the quarter. So that would be an adjusted net income, or a way to think about an adjusted net income. We would have had a much better result, if it were not for this accounting provision that we had to make.
Brian Wright: Great. We need to follow-up on the yield performance. And I just want to make sure that I’m interpreting your comments correctly. But it sounds like not only is the yield performance improved through the generations, but the performance of each generation over the years has been fairly consistent. Is that a fair observation?
Federico Trucco: Yes, Brian, in terms of the low yielding environments. So when we are talking about yields that are below the three tons per hectare, the Generation 1 materials, Generation two materials, and Generation three materials that are now being developed will all give you the same type of improvement. The difference between Generation 1 materials and two materials is around yields in the higher yielding environment. So when we are talking about four to five tons per hectare, where in the first generation materials we had a yield drag compared to the best performing commercial varieties that has been neutralized or overcome in the second generation materials.
Brian Wright: Great. But there’s no degradation from like the second year of that generation. on their relative.
Federico Trucco: Right, right. I mean, the materials, so yes, the performance of the trade survives as you move from one year to the next. There’s no degradation effect from one year to the next.
Brian Wright: Perfect, perfect. And then lastly, if I could, the Rhino Tech, just approval in South America, just any latest thoughts on timing?
Federico Trucco: So we don’t, we haven’t, I think, provided guidance on that in terms of Rhino Tech. I think it’s not likely to happen this year. The approval we’re looking for this year is the US approval, which is going to be very important for us. I think South America is most likely after this year.
Operator: The next question comes from the line of Kemp Dolliver with Brookline Capital Markets. Please proceed.
Kemp Dolliver: Hi, thank you and good afternoon. First question is looking at the gross margin in the Seeds and Integrated Product segment. And on a, say, product-by-product basis, were there any surprises with gross margins? Or was this strictly a matter of the increase in the HB4 business?
Enrique Lopez Lecube: Kemp, thanks for joining. This is Enrique. That’s a good question. No, no, no surprises on the product-by-product gross margins, individual gross margins. The drop in the overall gross margin for the segment comes from a product mix, but there were no surprises. Actually, there were slight price increases both in seeds and seed treatment packs. But obviously, there was a much higher contribution from sales from inventory of grain that have inherently lower margins than the rest of the plots. So that’s what’s driving the average gross margin for the segment.
Kemp Dolliver: Second question is the new IP that was granted. Could you tell us a little bit more about the nature of the IP? Since this is a U.S. patent, is this IP that you have elsewhere and you’re adding the U.S. or anything else on the subject?
Federico Trucco: Yeah, sure, Kemp. This is Federico. So this is the third family of patents covering the HB4 technology, and this is what we call the event-specific patent. So the first family was probably covering the DNA construct and the method of generating the HB4 events. There’s a second family of patents where we had certain modifications that help us achieve better performance. And then the third family is the one where you claim the insertion site in the seed, in the crop, that gives you the specific profile that results in the technology that we are commercializing. So, that — you will see kind of a mirror strategy in wheat. And this is what is allowing us to have a staggered approach to IP protection. We tend to do the filings first in the US and then file in all the PCT countries except for Argentina, and some other countries in Latin America that are not part of PCT where we have to file individually within a year.
So these — you can expect these same type of protection to happen in every geography where we have an HB4 soil aspiration.
Operator: [Operator Instructions] There are no additional questions left at this time. I will pass it back to Federico Trucco for any closing remarks.
Federico Trucco: Perfect. So thanks everyone for joining us again. It’s been a pleasure for us to announce these results. We are very excited about the way things are going in the current fiscal year. As I said at the beginning, despite the difficulties that have been experienced mostly by others in key markets like Brazil, and sometimes also the U.S. to be able to show this type of growth after growing last year as well, almost 25% on the revenue side, it’s very rewarding. So we’re delighted. We’re looking forward to a great second half, and wishing you all a very good rest of the week. Thanks and have a good evening.
Operator: That concludes today’s conference call. Thank you. You may now disconnect your line.
