S&W Seed Company (NASDAQ:SANW) Q2 2024 Earnings Call Transcript

S&W Seed Company (NASDAQ:SANW) Q2 2024 Earnings Call Transcript February 14, 2024

S&W Seed Company misses on earnings expectations. Reported EPS is $-0.13 EPS, expectations were $-0.11. SANW isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the S&W Seed Company Second Quarter Fiscal Year 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions to ask a question. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

Robert Blum: All right. Thank you all for joining us today to discuss S&W Seed Company’s second quarter fiscal year 2024 financial results for the quarter ended December 31, 2023. With us on the call representing the company today is Mark Herrmann, company’s Chief Executive Officer and Vanessa Baughman, the company’s Chief Financial Officer. For those that didn’t see Vanessa has joined S&W in a full-time capacity effective February, 12th, having previously served as Interim Chief Financial Officer and Corporate Secretary since May 2023. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. Before we begin with 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, planned 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 projecting 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 Accounted 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 Seed Company. Mark please proceed.

Mark Herrmann: Thank you Robert and good morning to all of you. I wanted to start with confirming the great leadership that Vanessa has provided S&W over the last six months as Interim CFO and how excited we are that she has accepted the permanent CFO role. I’m pleased to share the progress that we are making with you today to continually transition S&W into an efficient, operated best-in-class seed company, driven primarily by the rapid adoption of our high-value trait technology solutions within sorghum. As I have talked about since I took over as CEO back in July, my focus has been instituting key operational initiatives to drive the business towards profitability in the near-term. These operational initiatives have included 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 overall seed manufacturing cost reduction plan.

Seed operational improvements coupled with the high margin nature of our double team sorghum trait solutions resulted in our second consecutive quarter with gross margins above 30%, an improvement of 900 basis points compared with last year, as well as further reduction of our operating expenses by more than $1 million. The net result is a $1.4 million improvement in adjusted EBITDA, and please remember the second quarter is seasonally our smallest quarter of the year. Beyond the operational improvements my goal has been to build upon the existing trait technology pipeline that will ultimately be the key driver to S&W long-term success. Our first trait Double Team grain Sorghum has been the home run that we expected it to be. Sales during the second quarter were up 233% to $4 million as we continued to see strong farmer satisfaction, demand and adoption of the high margin trait technology.

As it pertains to the double team, I want to share a few points from our recent farm survey on brand health. First stop 100% of growers who use double team said that they were satisfied with the grass weed control system. Secondly, a 100% of the growers who tried Double Team system said they would be increasing acres in this coming year. Third, 87% of growers use a double team system stated they were satisfied with the performance. Fourth, 87% of growers saw the value of the Double Team system. And lastly, 100% of growers that double team was an easy to use system. Simply put the feedback from growers is positive on value satisfaction and performance of the system. Double Team provide superior grass weed control which protects yields under high weed pressure and delivers a positive return on investment and thus increases overall farm profitability.

For these reasons since its launch in 2021 and broader commercial launch in the calendar year 2022, Double Team grain Sorghum accounts for what we estimate to be 6% of all grain Sorghum acres planted in the US in spring of 2023 and believe it will grow to more than 10% of this year’s plantings of great Sorghum. 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 can be used as a substitute for many grains in the market today due to its key nutrient profile and its ability to handle higher temperatures drier climate better than many other crops and has been void of innovation to this point by larger agricultural companies. As I’ve said in the past corn soybeans and cotton growers have all benefited from the research investments in advanced tools for weed control technologies covers Sorghum’s has not benefited to this point from innovation despite being the fifth largest cereal crop globally.

There are currently about 15 million acres globally with the expectations to increase due to S&W’s introduction of new technologies to increase yield. It’s my opinion that as farmers increasingly recognize the value of new management tools, corresponding risk reduction in yield enhancement through controlling grasses and robust crop grazing safety technologies. These superior traits will drive greater numbers of Sorghum planted acres. We are looking to build upon the success of our team grain Sorghum with the introduction of Double Team forage sorghum solution and prussic acid-free trade for Sorghum. Initial double team forage sorghum sales are expected in the fiscal 2024 and a pilot launch of our prussic acid-free trade for sorghum is being planted this year.

High-value trait technology solutions will be a key driver to S&W long-term success. And it is clear that we are becoming a key technology provider in Sorghum. Our commercialization strategy is to continue to drive sales through our S&W owned Sorghum partners brand, but also align with independent seed companies with current market leading brands in key grain and forage Sorghum markets to maximize market penetration through licensing of S&W germplasm and or our traits. On that front in the US close to 45% of orders are with private label companies. And during the quarter, we have begun conversations with potential international licensees and have positive momentum leading us into the next season. We couldn’t be more pleased with the progress made to-date within our sorghum trait technology commercializations solutions as well as our pipeline.

For the year we continue to remain on target to achieve our stated goal of $11.5 million to $14 million of Double Team sales more than doubling our revenue from last year and don’t forget our gross margins on Double Team are approximately 65% which will be a key driver of future bottom-line improvement. Beyond our sorghum trait technology portfolio, another key value driver is our agreement with Shell to develop Camelina as a feedstock for biofuels, which Shell has a take-off agreement to develop green diesel SAF jet fuel production. We successfully achieved all the stated objectives required of VBO, and received the $6 million payment from Shell on February 6, 2024. As a reminder, the total paid to S&W inclusive of cash payments and repayments of a loan on the Napa facility was $20 million from Shell.

Infusion of capital is great. However, the excitement is really in the partnership and the financial interest. Remember, we currently own 34% of the JV. Our JV to produce sustainable low-carbon energy fuels solutions from novel Crop Sciences like Camelina. We are excited about the long-term value. We believe this JV will bring to the S&W and its shareholders. Within our Australia partnerships, we also received the expected $1 million payment from Trigall on January 2, 2024, as part of its position in the JV of the Australian wheat business. While we are achieving strong adoption in our high margin solvent-free technology solutions, as we reported in the press release. We are closely monitoring the dynamics from expanding conflicts in the MENA region on our international alfalfa operations.

The war in Ukraine and the civil war in Sudan as well as the conflict between Israel and Hamas, all contributing to expanded geopolitical conflicts in the MENA region has cause disruptions to normal farming operations and seed distribution channels. As we alluded to last quarter, we are seeing Saudi Arabia shifting acres to wheat, demand and price erosion as well as mix shifts in the marketplace, all putting pressure on our business in the region. Further into a smaller scale, we have seen a shortage in supply within the Australia pasture business with specific products, which has limited our ability to meet demand in Australia. The third and fourth quarters of our business are always the largest quarters of the year for us. We are monitoring the dynamics closely and began the fiscal year, a series of cost-cutting initiatives within our international operations as well as production optimization initiatives to mitigate any potential impact on our bottom line.

We will look to provide any further update as critical upcoming selling season continues. Again, our focus is on profitability in the near-term, not sales growth at any cost. I believe the actions that we have showcased on the margin improvement, OpEx reduction, successful execution of our high-value sorghum trait solutions and our JV with Shell, highlight our commitment to develop a best-in-class seed company for the long-term. With that, let me turn the call to Vanessa to review the financials. I will then look to quickly wrap things up and take your questions. Vanessa?

Vanessa Baughman: Thanks Mark. Good morning to everyone on the call today. Let me run through the details of the quarter, starting with revenue. Total revenue for Q2, 2024 was $10.9 million, compared to $12.9 million in Q2 of last year. Breaking it down further, Sorghum sales were $5.5 million versus $2 million last year, an improvement of $3.5 million. Of this Double Team was $4 million versus $1.2 million in Q2, a year ago, an increase of 233% or $2.8 million of the increase. International forage sales were $3.6 million compared to $8.6 million, a decrease of $5 million and US forage sales were $1.4 million, compared to $2.3 million, a decrease of $900,000. Looking at it geographically. We saw a $3.6 million increase in US sorghum, of which $2.8 million was associated with double-teen growth.

We also saw a $3.5 million decrease in MENA for the reasons Mark discussed. As well as our broader decision to not discount non-dormant alfalfa as cheaper European seed disrupted the market. We also had a $1.1 million decrease in Australia pasture products due to a shortage in supply. And finally, we had a $0.3 — the key points here, Americas and Double Team are up nicely, which are being offset by the macro drivers impacting MENA and Australia operations. Due to the dynamics in the MENA region, Mark discussed potentially impacting international alfalfa operations. We currently expect fiscal 2024 revenue to be on the lower end of the previously communicated range of $76 million to $82 million. As Mark mentioned, we are entering our 2 largest quarters of the year.

Breaking the guidance down further. We expect sorghum-related revenue is 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 to be $11.5 million to $14 million, an increase of 77% to 115% and compared to fiscal 2023. On the international side, we are expecting revenue to be on the low end of the previously communicated range of $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 margins. GAAP gross margins for the second quarter of fiscal 2024 were 30.3% compared to 21.3% in the second quarter of fiscal 2023.

This is now the second consecutive quarter with GAAP gross margins north of 30%. The improvement in gross profit margin was primarily driven by increased sales of our high-margin Double Team-traded sorghum and a more favorable product mix in the Australian domestic market. This increase was partially offset by decreased prices in the MENA region and increased sales of our lower-margin grain sorghum to Mexico. Looking to fiscal 2024 as a whole. Despite the strong first and second quarters, 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 quarters, 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 on the margin side to date.

Now, we’ll transition to operating expenses. GAAP operating expenses for the second quarter were $7.9 million, which is consistent with the first quarter of this year and an improvement compared to $9 million in last year’s second quarter. Breaking it down a bit, we saw a $0.4 million improvement from research and development expenses; a $0.5 million improvement in depreciation and amortization; and a $0.2 million improvement in selling, general and administrative expenses. Consistent with our expectations provided last quarter, we continue to believe total operating expenses for the fiscal year to be around $32.5 million, which is inclusive of depreciation and amortization. Now, to EBITDA. Adjusted EBITDA for Q2 2024 was a negative $3.2 million compared to adjusted EBITDA of negative $4.6 million in Q2 fiscal 2023, an improvement of $1.4 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 losses for Q2 fiscal 2024 was negative $6.5 million or $0.15 per basic and diluted share compared to GAAP net losses of negative $6 million or negative $0.14 per basic and diluted share in Q2 of last fiscal year. As discussed in previous calls, we will incur a loss of equity method due to our interest in VBO. During Q2 of this year that amounted to $0.6 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 loss as well.

As we discussed last quarter and mentioned in the press release, we received a $6 million payment from Shell in February of 2024. This number is not included in our cash number as of the end of December 2023. Despite our negative adjusted EBITDA expectation which translates rather closely, to our cash utilization. The payment from Shell is expected to cover any operating cash needs this year. Beyond fiscal 2024, if we are able to continue the growth in our Sorghum Technology Solution and achieve the benefits of the stability and cost containment initiatives across the remaining parts of the organization, it is our thought that we will be near a positive cash flow position in the future. Again, I am happy to follow-up with any of the details we went through, if you should have any questions.

With that, let me turn the call back over to, Mark.

Mark Herrmann: Thank you, Vanessa. As we’ve discussed we have had tremendous operational progress to move S&W towards a best-in-class Seed Company. Gross margins have improved substantially during the first half of the fiscal year. And we have built on the progress made last year, to reduce operating expenses. Our first trait technology product we have developed Double Team Grain Sorghum has been a home run that we expected it to be. Sales during the second quarter were up 233% to $4 million. As we continue to see strong farmer satisfaction demand and adoption of the high margin trait technology. We’re looking to build upon the success of Double Team sorghum with the introduction of Double Team forage sorghum solution and Prestwick asset free trade for sorghum both of which will recognize revenue in the coming season.

Our agreement with Shell to develop Camelina as a feedstock for biofuels, green diesel, and SAF jet fuel production, continues to move forward and meet all performance milestones and the $6 million payment from Shell came through this last week. We clearly have an important few months coming up here in alfalfa and sorghum growing seasons and are laser focused on executing against our business plan and mitigating any potential impacts that we may come across within our International operations pertaining to MENA. Overall I’m very pleased with the progress that we are making and am appreciative of the continued support of our shareholders. With that said, I look forward to taking your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Ben Klieve with Lake Street. Please go ahead.

Ben Klieve: All right. Thanks for taking my questions. First, a couple of questions on Australian operations. One, wondering if you could provide an update on the status of the strategic review. And then second of all, if you can comment on the kind of macro dynamics within Australia that you talked about, Mark, what effect, if any, they’ve had on the strategic — excuse me on the strategic review?

Mark Herrmann: Yeah. Thanks, Ben. So on the strategic review, several of the initiatives we were looking at implementing or options to unlock value we’ve decided weren’t beneficial for S&W shareholders. We’ve really moved to significant initiatives, most of them streamline costs and change our relationship in what I would call non-EBIT contributing business lines and or facilities. So we’re implementing those now and probably fully implemented by spring. Most of the financial benefits of cost savings and or structure changes will come in 2025 fiscal year. But we’re moving forward with those. So, we’ve got eight significant initiatives that are being implemented now by the local team.

Ben Klieve: Okay. Thank you for that. Next question on double-team. The performance in the second quarter was a positive surprise to me. I thought that revenue would kind of trickle in from that product in the second quarter, but it was much more material than I had expected. So, my question to you is, when you laid out your full year revenue expectations for that product, did you anticipate second quarter revenues of this magnitude or was that a positive surprise to you as well? And I have a follow-up question to that.

Mark Herrmann: Yeah. So it was part of the planning process, Ben. A significant portion of our sales in the US has now become third-party seed brands that are in licensing both germplasm and trade technology. So in the plan for processing and moving material in December and being able to position with seed companies that are then going to process that seed into their bag and prepare their channel for sales, it’ll happen earlier in the year. So we weren’t surprised by it. It was a significant initiative. It has been a big success for the operations team. If you remember last year, there were some challenges in smooth movement of material into the marketplace, and we’re sitting very, very well right now for calm and steady delivery through this winter period, right, February and particularly March.

So, we weren’t surprised by it. It’s all pretty consistent with our forecasts that are in place for the full year, but an extremely positive signal for the continued demand and success of the product in the marketplace.

Ben Klieve: Okay. Great. Thanks, Mark. And then, you kind of addressed my follow-up question, but I’m curious about the level of comfort you have with inventory levels for that product you’re having into the second half of this fiscal year. I mean, it sounds like you think you’ve got the inventory in place to hit that, revenue target of up to $14 million, but I’m just curious if there’s any kind of uncertainty around inventory to hitting the high-end of that number?

Mark Herrmann: No, we’re really sitting very, very solid. We’ve got one very high-demand product on the early side that has signals of being sold out that now, with sales organizations making sure that all that demand follows through. And then, the other key three and the key grain sorghum, have a good supply for us to keep aggressively selling right through spring. And then, we have a good supply of the new DT forage sorghum as well, continue driving demand. So we’re feeling very good about where we’re sitting at inventory. And of course, all this product was either produced last year or this year. So quality is solid, and we believe we’ve got a good handle on the LCM or obsolescence as well. So I feel very good about where the sorghum business is positioned right now.

Q – Ben Klieve: Great. Very good. And last question for me, regarding vision bio, on the historically you’ve talked about how this isn’t going to be something that an initiative that’s going to require any cash going from S&W to vision here and at least in the foreseeable future. But just curious, if that thought as I reiterated today, particularly in the context of like vision is making a modest investment and to out-licensing from a from another from another company. So is that is that still an initiative that you think is not going to be consuming in the S&W cash year, on at least for the next I don’t know 12 to 18 months.

Mark Herrmann: Yes, I believe that’s still consistent. You probably know from the original deal closing that Shell was putting in $13 million this year, into the operating budget for us BBO and then $12 million next year. And then the plan in place is that it would be creating enough, our revenues to be cash neutral and supporting the business operations going forward. So I know vision, bio is also working on their five-year plan simultaneously, to as we are. So we’ll give more information as we move through it. But I do believe that they’re hitting all the milestones that are in place right now, and fully anticipate that for the for the near term future as well.

Q – Ben Klieve: Very good on. Excellent. Well, I appreciate you taking my question, but the luck here, coming up in the second half of your fiscal year and I’ll get back in queue.