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spk00: Good day and thank you for standing by. Welcome to the BioSeries Crop Solutions Fiscal Fourth Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised, today's conference is being recorded. If you require any further assistance, please press star 0. I'd now like to hand the conference over to Maximo Goya. Thank you. Please go ahead.
spk03: Good day, everyone, and thank you for joining us. Presenting today's call is Mr. Erico Trucco, our Chief Executive Officer, and Enrique López-Lecue, our Chief Financial Officer. Both will be available for the Q&A session. Before I proceed, I would like to make the following state-powered statement. Today's calling contains forward-looking statements, and I refer you to the forward-looking statements section of today's earnings-releasing presentation, as well in our recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or change events or circumstances. Also, please note that for comparison purposes and a better understanding of our company's underlying performance, In addition to discussing our reported results, during our presentation today, we will discuss comparative results, which exclude the impact of hyperinflation accounting in Argentina. Additional information in connection with the application of the rule IAS 29 can be found in our earnings report. Finally, this conference call is being webcast. The webcast link is available in the investor relations sections of pscrubs.com. At this time, I would like to turn the call over to our CEO, Federico Trucco.
spk04: Thanks, Max, and thank you all for joining us today. Please turn to slide three for a brief overview of the business and financial highlights we will discuss in today's call. From a baseline business perspective, compatible revenues were up 39% to $72.4 million in the quarter, and 13% to $197.4 million for fiscal year 21, with LTM adjusted EBITDA at $48.3 million. Momentum consolidated in the fourth quarter, confirming a very strong second half to fiscal year 21, driven predominantly by sustained microbial fertilizer sales and the reorganization of the crop protection business. These revenues do not account for approximately $7.2 million of the total of $8.3 million of HB4 program contributed goods, with an average gross margin of 43%. However, Associated operating expenses were fully discounted from the adjusted EBITDA indicated above. H3-4 program revenues will be recognized once realized inventories are no longer contributed, but rather sold as seed or grain. Top-line growth for the quarter allowed us to remain on track with our historical LTM double-digit growth trajectory. while at the same time supporting the HB4 program rollout. Enrique will provide greater details around our financial performance for the quarter and full fiscal year later on this presentation. On the HB4 front, we have scaled up eight times compared to the previous year, with a total of close to 80,000 hectares planted with over 10 different wheat and soy 834 varieties. As we have done in previous calls, I will provide a more detailed update on agronomic performance, farmer acceptance, inventory scaling up process, or breeding efforts and collaborations across the Americas, and the current regulatory status for each crop. Two relevant highlights worth noting ahead of our more in-depth discussion are the regulatory clearance obtained in Canada for HB4 soy, and the expansion of our collaboration agreement with Grupo Don Mario to North America, especially targeting the Southern Canada, Minnesota, and the Dakotas region. We will also discuss these two highlights in greater depth in the next slides. Please turn to slide four for an update on the ongoing HB4 wheat season. HB4 wheat was planted in 55,000 hectares with contributed goods totaling $6.4 million. As previously explained, the value of these contributed goods will be recognized as revenues once the realized inventories are sold as seed or grains but not longer contributed. The current multiplication area represents a 7.8 times increase over last year's efforts. including varieties adapted to 75% of Argentina's addressable market. The number of participating growers increased eightfold, with a 100% grower repeat rate, and very importantly, with 95% of participants onboarding digitally. The crop is evolving favorably, with recent rains normalizing the drought situation suffered in some of the subregions. In slide five, you will see the results of our HB4 soil ramp-up process as we finish harvesting all 23,000 hectares planted last season. From a trade performance perspective, results were aligned with technology expectations, with HB4 materials showing significant yield benefits in highly restricted environments. particularly in those with average yields below 1.5 tons per hectare. However, the accumulated yield benefit was diluted as moderate to highly productive environments were aggregated, as current germplasm is still behind some of the most competitive commercial materials. This germplasm drag can be better observed as we zoom into the discrete yield intervals in the next slide, with as much as 9.1% yield reduction on average in environments between 2.5 and 3.5 tons per hectare. This phenomenon was more pronounced in our eldest varieties, which yielded on average 11% less than a selected group of top commercial performers. The germplasm drag became less concerning as we evaluated newer materials, with second-generation materials on only 3% below the same group of commercial controls and some third-generation varieties matching and even beating top commercial performers. One interesting observation illustrated in slide seven is that when cropped after wheat in double cropping systems, the germplasm drag is minimized and performance greatly improved, at least in some of the second-generation materials where these could be tested. And this is shown here in the current slide. In summary, turning to the next slide, HB4 wheat inventory ramp-up is progressing as expected, considering that we still have not received Brazil's regulatory clearance. which we will discuss in a moment. HV4 soil inventory ramp-up is being redesigned to address termplasm drag in earlier materials with ramp-up of first-generation materials discontinued and second-generation materials repositioned to double cropping systems as we accelerate multiplication of third-generation materials targeting the broadest HV4 acreage opportunity. Turn to slide nine. Concomitantly with our internal efforts, we're expanding our existing collaboration with top-tier soybean germplasm developer, Grupo Don Mario, with which we signed a new agreement during the quarter to jointly develop and commercialize HB4 soy in North America, more specifically in the subregion including southern Canada, Minnesota, and the Dakotas. where we believe there are approximately 10 million hectares highly prone to water deficit. As you may recall, Grupo do Mário is an early licensee of the HP4 trait for its Latin America soybean programs. And also, during the last year, we have expanded our green collaboration with PMG, one of Brazil's top providers of soybean genetics, with 173 pre-commercial HB4 soy varieties currently being tested, and approximately 100 hectares of demo plots being organized with selected farmers during the upcoming season in that country. So GDM and TMG are expected to provide materials as soon as 2023 for the HB4 program in LATAM, as well as commercialized directly in the future using their existing go-to-market models. Finally, turning to the next slide, I will discuss the main regulatory highlights for the quarter. Received regulatory approval for each report soil from the Canadian Health Agency and the Canadian Food Inspection Agency. As you know, with approximately 2.5 million hectares farmed every year and yields often below the three pounds per hectare, Canada's soybean production regions are well suited for HB4 value generation. So HB4 soybean is approved today for production in the United States, Brazil, Argentina, Paraguay, and Canada, representing 85% of the world's soybean hectarage. During the quarter, our regulatory teams admitted HB4 wheat consumption approval requests in Australia, New Zealand, South Africa, and Indonesia. Near the end of the quarter, Yoselis received a formal requirement from Setenebio, the Brazilian regulatory body, to provide additional gene expression information for native, non-targeted genes of relevance to regulators. This information was produced and filed with Setenevio by August 18th, continuing the HB4 wheat regulatory process in that country. No additional information has been requested during the quarter by Chinese regulatory authorities regarding HB4 soy, and we believe both regulators, Brazil and China, should be able to resolve approval requests in their upcoming proceedings and look forward to communicating their findings as they are informed to us. This concludes my prepared remarks. I will now turn the call over to our CFO, Enrique Lopez-Lecue, to discuss our fiscal fourth quarter financial results. Enrique.
spk02: Thanks, Federico. Good day to everyone, and thanks for joining us today. Getting to the financials, please turn to slide 11 for a review of the revenue performance during the quarter and full fiscal year. As Federico outlined a few minutes ago, we had a strong fourth quarter performance with comparable revenue rising to $72.4 million, from $51.9 million in the fourth quarter of fiscal year 2020. a solid 39% increase than consolidated momentum from the third quarter. Growth during the quarter was mainly driven by a successful outcome from the reorganization initiatives taken earlier in the fiscal year to reignite growth in our crop protection business segment. Crop nutrition also contributed to the increase in comparable revenues as the migrated fertilizer business line continued to expand, confirming the growth trend that had been displayed in the third quarter. The 48% and 46% increase in crop protection and crop nutrition compatible revenues respectively were slightly upset by an 8% drop in seed and integrated products. On a reported basis, the increase for the quarter was 71%, from $48.2 million to $82.2 million, This increase in reported revenues was significantly higher than the evolution of comparable revenues as IAF29 adjustments decreased the basis of the reported figure in the fourth quarter of 2020 and expanded the reported metric for the fourth quarter of 2021. For the full fiscal year period, total comparable revenues were up 13% to $197.4 million compared to the year-ago period, with revenue growth across all three business segments. Despite the softened performance during the second quarter, which had been negatively impacted by drought in key markets across South America, a strong second half of the fiscal year allowed the business to maintain a double-digit growth trajectory, even without the inclusion of $7.2 million out of the total $8.3 million of contributed goods from the HB4 program. Please move on to slide 12 now for a breakdown on fourth quarter revenues per business segment. The $20.5 million increase in comparable revenues was driven by crop protection and crop nutrition, with a slight drop in seed and integrated products. Crop protection sales were up 48% from the year-ago quarter, reaching $42.9 million. Growth across the segment portfolio resulted from the implementation of a reorganizational strategy intended to uncouple market access channels and teams dedicated to proprietary products from lower margin third-party products. The expansion during the quarter was mainly driven by higher insecticides, fungicides, and adjuvant sales in Latin America, specifically B2C sales for the latter category in Brazil. Average gross margin for the segment decreased from 39.9% to 36.2%, primarily due to increased sales of lower-margin seed treatment therapies. The other growth contributor for the quarter's comparable revenue expansion was the crop nutrition segment, which grew to $22.7 million across both product categories. A strong performance of the microbe fertilizer product line during the quarter is the outcome of the shift in the commercial strategy that was implemented two quarters ago to enhance the attractiveness of the value proposition to farmers. Following an already improved performance in the third quarter, the trailing last 12 months rate of usage of installed capacity increased from 30% to 40% on a sequential basis. In Oakland sales also had a very good performance with volumes increasing from 2.5 million doses to 4 million doses. Increased demand of high added value in opulence in Brazil, which fully recovered the decline of the third quarter, was the main growth driver in this category. Margins for fertilizers remained stable as volumes scaled up, with the overall crop nutrition gross margin slightly expanding to 54.2%. TIDA integrated products comparable revenues in the fourth quarter of fiscal 2021 stood at $6.8 million, slightly below the year-ago quarter. The $0.6 million decrease was driven by sea treatment packs, despite volumes remaining flat at 1.1 million doses. A proportion of the growth that we had accomplished in South Africa in the fourth quarter of fiscal 2020 was replaced by lower price packs in Latin America. Lower packs contribution, as well as a slight shift from B2C to B2B pack sales in Argentina, led to a segment gross margin drop, from 63.5% to 53% this year. Overall, we are very satisfied with growth in revenues during the quarter, which was accomplished with an average 43.4% comparable gross margin. It is worth mentioning that aside from the pricing, volume, and product mix dynamics I just described, gross margins during the quarter were also affected by effects on inflation dynamics in Argentina, where we hold most of our production facilities. Inflation-related price increases of raw materials and manufacturing costs denominated in local currency exceeded the benefit of the Argentine peso depreciation, which negatively affected production cost structures of some of our products. The interaction between effects and inflation rates turned into headwinds during the fourth quarter of fiscal 2021, from tailwinds in the year-ago quarter, further emphasizing an unfavorable comparison. Moving on to slide 13, which shows the breakdown of gross profits per business segment. As a result of the revenues and margins evolution addressed in the previous slides, compounded gross profit for the quarter rose by $6.9 million from $24.5 to $31.4 million. Compounded gross profit from crop protection was $15.5 million, up $4 million from $11.5 during the previous fiscal year quarter. Cheetah integrated products contributed a total of $3.6 million in comparable gross profits during the quarter, down $1.1 million from the year-ago period, in line with the evolution I described in the previous slide. Finally, crop nutrition delivered $12.3 million in comparable gross profit, an increase of $4 million from $8.3 million a year ago. It is to be noted that crop nutrition displayed the highest growth within the three business segments, reaching a contribution of almost 40% to total comparable gross profit. Reported gross profit rose by $9.6 million to $32.4 million. The increase in as reported gross profit was higher than the increase in comparable gross profit, following the same IS29 adjustments dynamics described for revenues. Let's now please move on to slides 14 and 15 for a review on EBITDA performance for the quarter and the last 12 months respectively. The $9.6 million increase in as reported gross profit was the main contribution to adjusted EBITDA growth for the quarter, which increased 13% and totaled $16.6 million compared with $14.7 million in the year-ago quarter. Conversely, operating expenses and other income and expenses rose by $5.6 million and $0.5 million, respectively, including an expense increase of approximately $1.3 million related to data acquisition within the HB4 program, the rollout of the digital platform, and increased support to the program as Hector scaled up. Setting aside HB4-related expenses, SG&A from the operation of the baseline business increased primarily due to a mix of fixed and variable operating expenses related to the expansion of the business. Employee salaries and social security expenses increased by $1.6 million driven by growth in the Brazilian subsidiary as well as the reorganization process to support growth in the crop protection segment. Also, variable sales related tax expenses grew by $1.2 million in line with increased revenues during the quarter. On a different note, similar to manufacturing costs, and behavioral inflation and effects dynamics in Argentina, where the main administrative and support functions of the company are located, also had a negative impact in expenses. Despite the increased total SG&A, expenses were down 234 basis points as a percentage of revenue, from 21.7% to 19.4%, denoting operational leverage. R&D expenses totaled $2 million during the quarter compared to $0.8 million in the fourth quarter of fiscal 2020. Approximately two-thirds of the R&D expenses in the quarter were related to the development of seed and traits, and the remaining third was related to the development of new biofungicides and biostimulants. Finally, JVE results decreased by $1.5 million compared to the fourth quarter of fiscal 2020, mainly due to IAS 29 adjustments on Cinertec, the company's micro-rated fertilizer manufacturing JVE. In slide 15, adjusted EBITDA for fiscal year 2021 totaled $48.3 million, a 4% increase versus fiscal 2020. Sales growth spanned all business segments with, as reported, gross profit increasing by a total of $11.1 million, composed of $9.3 million increase in comparable gross profit and a $1.8 million positive adjustment from IS29. The divergence between as reported and comparable metrics for the full year was lower than the fourth quarter figures as IAS 29 adjustments tend to decrease in a scenario of conversions of inflation and effect depreciation in Argentina. Growth in gross profit was partially offset by an increase of $7.9 million in operating expenses with a fourth quarter dynamics explaining most of the increase and bolding the yearly trend. Importantly, a CNA for fiscal year 2021 includes expenses related to the ramp up of the HB4 program, while deferred revenues from contributed goods are yet not fully reflected in revenues and gross profits. Inflation and effects dynamics in Argentina also had a negative impact in the full year expenses compared to fiscal year 2020. Following the $48.3 million adjusted EBITDA achieved during the fiscal year, supplementary cash flow information is presented in the right-hand side of the slide. Investment activities totaled $16.7 million during the full fiscal year. $4 million were invested in tangible assets, including maintenance capex, as well as the acquisition of land for the expansion of the adjuvant manufacturing facility in Brazil. Investment in intangible assets during the year stood at $6.4 million, with roughly 35% allocated to the continuous development of the HB4 digital platform. Finally, the acquisition of Verdeca and other assets from Arcadia Biosciences mainly explained the $6.3 million in acquisitions during the year. From a tax perspective, income tax accrued over the period, excluding deferred tax liabilities, stood at $7.3 million. Additionally, $1.8 million of deferred tax liabilities from previous fiscal periods were paid during fiscal year 2021. Finally, net cash financial expenses and commissions accrued for fiscal year 2021 totaled $14.6 million. Let's now please turn to slide 16 to address our debt evolution and cash position. We continued to make good use of Rizal Actors' partnership with Argentina Trade Markets throughout the fourth quarter, as we completed a $26 million public offering of Series 5 corporate bonds in early March. 20% of the issuance had a one-year maturity and an annual coupon rate of 0.98%, and the remaining 80% was issued with a maturity of 36 months and an annual coupon rate of 5.5%. The total financial debt increased by $22.5 million from the fourth quarter of fiscal 2020, first left-hand side column, to the fourth quarter of the current fiscal year, while total LPM financial expenses decreased by 16%, from $17.3 million to $14.6 million. Total net debt as of June 30, 2021, was $121.3 million, 2.5 turns net debt to adjusted EBITDA. The increase in the company's debt ratio compared to the prior fiscal year was primarily due to increasing total financial debt as the company replaced inefficient working capital sources with corporate bonds. On a sequential basis, net debt to LTM adjusted EBITDA decreased from 2.89 turns on March 31st, 2021, primarily due to reduced short-term debt position and higher LTM EBITDA. The liquidity front, cash and cash equivalents, and short-term investments represented approximately 67% of the current portion of debt. That concludes the financial remarks for today. So, I will now turn it to Federico for concluding remarks.
spk04: Federico Morales Thank you, Enrique. Moving forward to the next slide, we can summarize some of the major highlights for the fiscal year 21 where we had double-digit top-line growth across all three segments despite a softened performance in the second quarter due to the climatic situation in South America. Growth mainly driven by the development of the microbead fertilizer expansion plan and the fourth quarter crop protection reorganizational strategy. Contributed goods for HB4 program, both HB4 wheat and HB4 soy, increased significantly to $8.3 million, approximately $105 per hectare farm, with gross margin of approximately 43%. And the value of these contributed goods, as we indicated before, will be recognized as revenues once the realized inventories are sold as seed or grain but no longer contributed. HB4 wheat was commercially approved in Argentina on October of 2020, subject to Brazilian import approval for full commercial launch in Argentina. This approval represents a historical milestone for the entire global value chain, being the first biotech wheat event to be fully cleared. We acquired The remaining HB4 soy ownership interest in Verdeca, LLC, aiming to accelerate breeding and go-to-market strategies. Complete ownership will enable us to capture more of the underlying economic value generated by the technology. And as part of the transaction, the company acquired Verdeca's studied soybean library of gene-edited materials for developing new quality and productivity traits. as well as exclusive rights to all of Arcadia technologies applicable to this crop. BioCeres has also been granted Latin American rights to Arcadia's wheat traits and good wheat brands and other GLA non-code assets. During the period, we successfully completed the offer to exchange all 24.2 million outstanding warrants. in a cost-effective manner, eliminating the future delusion entailed by these derivatives. There were $17 million of total financing obtained also during the last fiscal year. $43 million of funding was added through the company's main operational subsidiary, Resurrector, issuing the Series 4 and Series 5 corporate bonds and making a considerable progress towards substantially lowering financing costs, extending that maturities and increasing financial flexibility as indicated by Enrique. 28.7 million equity financing completed through the aforementioned Verdeca's acquisition and the warrants tender offer transaction. Management has been focusing in unlocking value from stocks' liquidity alloc, a creative deal structure with strategic equity components as the ones just described, on top of selective and persistent IR efforts resulted in a 70% year-over-year improvement of the three-month trading moving average in terms of stock liquidity. Moving to the next slide. Coming up next, in terms of fiscal year 22, you can expect from a baseline business perspective to see reignited profitable growth in the seed and integrated products segment, the same way we saw in the crop nutrition and the crop protection segments over the last two quarters. continue to move forward with our digital platform, releasing some of the developments we have generated in this front. From a product development and go-to-market perspective, accelerate the ramp-up of the third-generation materials for both H3-4 soy and H3-4 wheat, and start ramping up inventories for the good wheat materials being licensed from Arcadia. On the regulatory front, we're expecting China and Brazil regulatory clearances of H3-4 soil and H3-4 wheat, respectively, and also continue to work on the downstream and ESG initiatives to build on the data we're accumulating and provide data-driven ESG scoring of produced inventories under the HPO program targeting downstream specifications. So this essentially concludes today's management overview. I will now open up the floor for any questions that you may have.
spk00: And as a reminder, if you'd like to ask a question, simply press star 1 on your telephone keypad. Your first question comes from the line of Ben Cleave with Lake 3 Capital Markets.
spk06: All right. Thank you for taking my questions. First question on the quarter itself, great result, really. Congratulations on a strong end to the year. I'm curious if you can talk about the initiatives that you've taken in both the nutrition and the protection segment, and talk about kind of your expectations for fiscal 22 around those initiatives. I mean, you guys are now coming off of a really difficult comp given how good of a second half you had. So I guess I'm curious, you know, how much further improvement do you expect in these two parts of your business throughout fiscal 22?
spk02: Hi, Ben. This is Enrique. Thanks for joining us today. Good to have you on the call. So from those two business segments standpoint, in crop protection, as I was saying in the previous remarks, we try to divide the channels and the teams, the commercial teams that are focused on the proprietary and more valuable or more profitable products from other products that are a good business opportunity for the company, but that require a different level of attention a different approach to market, such as third-party products, services also that are a good opportunity for the business and the company, but are not strategically attractive. So that reorganization process already started delivering results. I think that might continue throughout the year, delivering incremental results, but this is more of a one-time reorganization process and not something that will continue delivering results year after year. So, that means more of a one-timer versus what we are seeing in production, where the new commercial strategy around micro-heated fertilizers is working very well until now. If you remember from previous calls, we decided to heat gas with ramping up the volumes of fertilizers, being a bit more aggressive. pricing farmers but trying to keep margins as we did that and to me that third quarter and the fourth quarter were a testament to that we were able to significantly increase the use of the capacity and that is something that we hope will continue delivering uh results uh over the year fiscal year 2022 remember that we are targeting to to get to upwards of 60% sometime in the next two years, with the use of the bulk capacity. So still a long way to go, but the strategy is still leering. And in Octagon, it's obviously a very, very attractive business segment to us. In Latin America, we are already a market leader, but we are seeing that growth is still happening and taking place in the product category. And the good thing is we have diversified geographic footprint. So as you saw in this quarter, what we lost in South Africa was recuperated in Latin America. What we probably lost in Brazil last quarter was recovered this year. So still a source of growth to us. And I think that the main strategic point there is geographic distribution globally. And remember that this is the product for which we are globally known in the agribusiness industry, more specifically in biologicals.
spk06: Got it. Okay, that's helpful. Thanks, Enrique. Pivoting over to HB4, there's a lot going on here, and I'll admit I'm a little confused at the near-term expectations, especially for soy. I understand the first, second, third generation breakdown that you gave. But for that second generation that you've outlined as being pretty efficient on poor quality farmland, is the expectation that you're going to be revenueing a second generation seed here in fiscal 22? And if so, what kind of inventory levels do you have of that second generation material?
spk04: hi ben this is federico thank you for joining the the call and thank you for the question regarding the hb4 soy ramp up process so what we wanted to basically illustrate there is how as we move forward in our breeding efforts we're improving on the general performance in moderate to highly productive environments and not just the hb4 benefit in these highly restricted environments where we know that technology can deliver 15, 16% yield improvements, which we believe to be important for the varieties to be used broadly and to minimize any kind of user discomfort, if you will, if for whatever reason situations are good from a rainfall perspective and farmers experience a drag due to the germplasm gap. The second generation varieties of the 23,000 hectares we just harvested, less than 15% of those were planted with second generation materials. So what we wanted to tell you here is that our ability to ramp up in the coming season, it's probably going to be less than what we did in the last year. So last year we did eight times what we did the year before. We think this year will be at three to four x because of sort of the constraint generated by the performance in the first generation varieties which we will not continue to scale and the repositioning of all of the second generation materials to double cropping systems or highly restricted areas we want to make sure that farmer experience is excellent and and that is kind of what we're putting in the balance here as we designed uh the process uh for the coming season now we're still in rampant mode so you won't expect to see you shouldn't expect to see revenues materializing until we get the china approval Having said this, if we discontinue some inventories and that gets to be sold as grain or sold as a grain derivative, you will see that coming to the P&L process in the coming year. And maybe Antique can give you more color regarding as to how that gets materialized. But I'll pause here to see if your question was fully addressed. Otherwise, I'll try it again.
spk06: No, I think you did, but that presents another question, then, your comment about basically needing to wait here for Chinese approval. So does that imply that commercializing HB4 soy via an identity-preserved supply chain and ensuring grain customers are domestic, that that's not an initiative that's going to be undertaken here? you know, in fiscal 22? That fiscal 22 for soy is going to be purely an inventory ramp year and not a commercial year for HB4 soy?
spk04: It's going to be an inventory ramp year for the materials we get to keep for future sales at seed, and it will become a revenue year for materials we're discontinuing and we're sending into an identity preserve industrialization path. Okay.
spk06: All right. That makes sense. Okay. And then I guess the last question on HB4, you talked about the double crop system here now with wheat and soy. Really, what does that look like? What's the double crop system in Argentina from a timing perspective? When are they planting wheat and when are they following up with soybean planting?
spk04: So wheat has already been planted. It's usually June, July planting, depending on the area. And then, depending on the level of humidity, farmers might want to do soy after wheat in November, December. That is where we're seeing that HB4 performance is intense, particularly in the moderate environments and moderate to highly productive environments. where we saw the germplasm drag. And there are 6 million hectares today that are under the double cropping system in Argentina. So this is not an insignificant opportunity where we have not only performance in soybeans that we can point to, but also where we can leverage on the terrific performance of our wheat varieties. The HP4 wheat performance that is beyond dispute can be a terrific complement to these soy products that outperform commercial materials in double-cropping systems. So while this is still a fraction of the overall opportunity we're seeking with HP4, I think it's one that we can make use of right away with the second-generation materials we're currently scaling up.
spk06: Okay. Last one for me, and then I'll pass it over. You talk about fast-tracking third-generation materials. Really, what does that mean? What initiatives are you taking to fast track and what's your expectation for how inventory build can grow over the next year or two given this fast track approach?
spk04: So the fast-tracking is essentially doing off-season production. So instead of having one cycle of multiplication every year, we will try to, particularly early on when we're talking about hundreds of hectares and not thousands, do off-season in the U.S. like we have done in the past for some materials. So that's currently happening. I believe that we will probably be on a few thousand hectares with third-generation materials in the coming up season on the aggregate. And the remaining, obviously, to achieve the 3 to 4x will be with second-generation materials. And a significant portion of that as a follower to wheat. We believe that in the next cycle, we should not be hindered by the performance of the materials or by the availability of inventories, but we will be dependent on Chinese approval. As I said before, moving identity preserve beyond the half a million hectare mark, it's challenging. So we think that if we do things right from a multiplication perspective, we should be able to be there, and then the Chinese clearance becomes of greater relevance than what we have today. Okay.
spk06: Okay, very good. Well, appreciate the comments from both of you. There's more to talk about, but I'll turn it over to the other analysts. Thanks for taking my questions. Thanks, Ben.
spk00: And again, if you'd like to ask a question, simply press star 1. Your next question comes from the line of Kent Delver with Brookline.
spk01: Hi, thank you. A couple of questions. First on your presentation, you mentioned you expect regulatory approval in fiscal year 2022. Do you have increased confidence or is it based on regulatory interaction or Is this just to reflect the passage of time? I'm trying not to read too much into that piece of information in the slide.
spk04: Well, thanks, Ken, for joining the call. I think the answer is a combination of all these different aspects that you have indicated. For instance, in terms of the Brazil process for HB4 wheat, that's an active process. We can follow what happens in every meeting. We got questions sent to us, I believe, in the June meeting. After the process was ready to be decided, those questions asked us to generate additional data, essentially to look at how HB4 may affect other genes in wheat that can potentially be of allergen linked. And we did something that has no precedence. We basically evaluated every single gene in wheat and show that there was no change. And we provided that data back to regulators in August 18th. The first meeting since we provided that data was conducted at the first days of September. So there was not enough time probably between our filing and that meeting for regulators to have a full view of the data package. But there's an upcoming meeting in October where we believe enough time would have elapsed for them to come to a conclusion. And then we don't know what that conclusion will be, but there is a process that we can more or less track and we can get an additional question or we can get an approval. So that's where we are in terms of with the Chinese process, We have less visibility. All that we know is that we are not getting more questions, and this has been the case since last year. So we didn't get any additional questions from Chinese regulators during 2021. They have not met yet, and we don't know when the next meeting is going to occur. There usually is a meeting... in the health first half of the year but that has not occurred and this is not the status related this is for all gmos that they evaluate so we don't have a meeting diarized that we can sort of point you to today but that is kind of where we are in our understanding of the process in china and from a time perspective where within the customary time frame within which they've made decisions in the past for other events that they have approved.
spk01: Okay. Fair enough. That's very helpful. My second question relates to your comments on Canada, and typically we've assumed that small subsets, say 25% of acreage in a given market, would be appropriate for HB4 products, and your comments on Canada Today suggested it might be more than that, given the geography. Does that reflect increased visibility on the market opportunity there?
spk04: Yeah, that's a very good point, Ken. The 25% is a rule of thumb across sort of the Americas, I would say. But when you look at the subregion that is entailed by southern Canada and some parts of the northern U.S., like Minnesota and the Lakotas, there are 10 million hectares, they are all combined, where we expect penetration to be higher than 25 percent, because these are hectares that are often prone to water deficits and where average yields tend to be below the three tons per hectare, sometimes even below the 2.5 tons per hectare. So the value proposition of HP4 becomes even more compelling. That's why we were eager to secure germplasm for this region. And one thing we're effectively announcing today is the Don Mario collaboration, to be able to have maturity groups to and below that are specifically suited to this part of North America and take advantage of having all the approvals in place to capture on these sectors.
spk01: Great, thanks. And this will be my last question, and it relates to the partnerships. How do the partnership economics work, and most specifically do they have any impact relative to doing this on a standalone basis?
spk04: Well, I think there are two important aspects. Usually the technology is priced on two different fronts, the germplasm, the hardware, if you will, and the trait, the software that goes into that hardware. So we are software providers from an HP4 perspective. We have our own hardware company when we are discussing our proprietary program. The data that you saw from Latin America, from Argentina, comes from our hardware company where we're combining HP4 with our proprietary germplasm. If we use someone else's hardware, that person gets to keep the $3 to $4, sometimes even $8 hardware. per bag that are usually hardware dependent. When we jointly develop the hardware, we split that 50-50, but that doesn't do anything to the price of the software, which we get to keep ourselves for Verdeca, if you will, that we fully own today, that is the developer of the trade. We might give certain incentives when we're working with partners on the software revenue, and they can be between 15% to 30% of the trade price or trade fees, depending on how deeply involved we are and whether they meet or not certain metrics. But this is building additional economics beyond what we originally had from a germplasm perspective. Don Mario providing their germplasm capabilities, co-financing that so that we can have ownership into those additional economics and keeping everything else from the trade side the way it is for a traditional licensee.
spk01: So to be clear, the net effect for you is minimal based on what you had previously indicated to us.
spk04: Yeah, I mean, we're not having a leakage on our HP4 value in general. There will be some germplasm royalties coming to us due to the investment we will be making jointly with Mario. But the important thing here is the ability to capture a geography we would not be able to capture in the absence of Mario because we do not have varieties. adapted to this region of North America from our proprietary efforts.
spk01: Great. Thank you.
spk00: Your next question comes from the line of Stephen Austin with X. Good morning.
spk05: Good morning, Stephen. I'm on the great top line. It seems to be that the strategies that you're putting into the crop protection and the crop nutrition segments is gaining traction. This will be kind of a long-winded question. Just looking at it overall, it appears that the seed business, it's a geographic expansion story. and with Argentina, of course, but lightning could strike here in Brazil and China. The nutrition area is a capacity utilization story, and you have plenty of room to ramp up the utilization, and you're on track there. But looking at the crop protection area, With this reorganizational strategy, with bringing on these dedicated teams, it seems like there's a structural increase in the SG&A, and could you talk about that? Because the SG&A jumped up substantially during the fourth quarter, but as you say, it's still a lower percentage of sales. because this top line grew so much. But could you talk about what structural implications there are in the SG&A line concerning the reorganizational strategy?
spk02: Hi, Steven. Thanks for joining us today. Pleasure to have you on the call. So I think that your overview of the different initiatives is accurate. On your specific question on SCNA, bear in mind that in SCNA we are today accounting for expenses related to the launch of the digital platform, the rollout of HB4, and that is yet not having an impact either on the top line or profitability. So to me, that is an important point on SCNA. And then on your question, your specific question about the crop protection reorganization process, That is something that didn't take much of the increasing SG&A that you see. It might be about 20% to 30%, no more than that. And that also takes into consideration Brazil, the ramp up of SG&A. I really think geography work. Year after year, we're seeing good levels of growth. But in order for that growth to be captured, we need to put in place the support functions to allow for that growth afterwards. So we keep track of the SG&A expenses in Brazil that we put in place in one specific period and materialize the sales growth on the following period. So that's the way we think about Brazil. So the SG&A increases a combination of those three things and not specifically attributable to the reorganization process in equal protection.
spk05: Thank you. Also, I noticed the R&D line increased substantially. Is that because of the second and third generation HB4 soy?
spk02: Well, that is a combination of things. Part of the expenses in R&D that you see there have to do with further regulatory requirements. Request approvals, approval requests that we made and that you saw in the slide that we presented, part has to do with developing and obtaining registrations for products in our geographies, biologicals mainly. So it's a split between regulatory expenses for the seed business and product registration for adjuvants and biologicals in our geographies.
spk05: Thank you. And thank you for taking my questions.
spk00: We have a follow-up from the line of Kim Delver with Brookline.
spk01: Thank you. Quickly, you had the refinancing with Ryzenbacter several weeks ago. What range of interest savings do you expect from that?
spk02: Thanks, Ken, for the question. I think that we've now reached a point at which our average cost of debt is stable. So we don't expect further savings from future issuances. But those issuances allow to refinance our existing debt, maintain our leverage ratio, So we are now standardized, and I think that opportunities within the debt space will have to do more with extended maturities than lowering our average cost of debt.
spk01: Great. And this is my last question. You've made a few comments about Argentinian inflation this period, and the CPI numbers are poor. the last couple of months have been, I think, as high as 50%. How are you thinking, if nothing else changed in an inflation state at this level, how are you thinking about the margin impact over the course of the next year? Is this something that will taper off, or do you expect that the magnitude of impact on margins could continue?
spk02: That is a great question, Kemp. We don't look at effects on inflation on a standalone basis. In Argentina, you need to look at those two variables together. So what we've seen in the past, actually decades, is that inflation and valuation or depreciation of the local currency converge in the long run or in the mid-term. It might be that in the short term, there's a divergence like it happened in these last two or three quarters in fiscal year 2021 and that turned into headwinds for our cost structure, manufacturing costs, and that impacted the growth margins, but also some of our SG&A costs. But in the last two or three quarters, depreciation of the currency in Argentina lagged inflation. So that should catch up at some point. So if something, the effect of these two values should be minimized.
spk01: Thank you.
spk00: And at this time, there are no further questions. I'll turn the call back over to Federico Trucco for closing comments.
spk04: okay so thanks everyone for for joining us I know this is a lot of information in in today's call so I hope that you can feel free to reach us back if you need further detail or further explanations we stand fully available we're happy with the performance that was obtained in fiscal year 21 and particularly after what we saw in the second quarter. So a second half that was very strong and allows us to show the results we're showing today. So thanks again. I hope everyone has a great week, and we are fully available should you have any follow-ups. Thank you.
spk00: Thank you, ladies and gentlemen. That concludes the call for today. You may now disconnect.
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