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spk01: Good day and welcome to the Maroon BioInnovations first quarter 2021 earnings conference call. Today's conference is being recorded, and at this time I would like to turn the conference over to Linda Moore, General Counsel. Please go ahead.
spk05: Good afternoon, everyone, and thank you for joining our call. Welcome to the 2021 first quarter earnings conference call for Maroon BioInnovations. On the call today are CEO Kevin Helash, CFO Su Chung, and Mati Tianan, Senior Vice President of International Sales. If you would please refer to slide two, I would like to remind you that this conference call may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding management's future expectations, plans, projections, forecasts, and prospects. Certain material assumptions were applied in reaching these conclusions and making these statements. Therefore, actual results could differ materially from those contained in our forward-looking information. Important factors that could cause differences are contained in the reports filed by the company with the Securities and Exchange Commission, including under the heading Risk Factors, MD&A, and elsewhere in the company's annual report, quarterly report, and other filings. The company expressly disclaims any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this call. After our remarks, we will hold a question and answer session. I will now turn the call over to our CEO, Kevin Helash. Kevin?
spk08: Thank you, Linda, and thanks to everyone joining us on the call today. We are now one-third of the way through the year, and I would point to three key indicators that will continue to define our success in 2021. One, we are progressing rapidly toward delivering breakeven on an adjusted EBITDA basis. Our first quarter results support this financial target, and Sue will provide more color on our numbers in a few minutes. Two, we are accelerating our commercial expansion on multiple fronts, And Maddie will provide an update on our global launch plans in the large acre row crops. And three, we intend to be the leader among our ag biological peers in terms of bringing sustainable products to the market. I'll speak in a moment to an important study we recently published that supports this position. If you would turn to slide three, I'm very pleased with the start to 2021. As we have noted before, The first quarter is a seasonally slower period for us and one that is driven by our specialty crop business in the United States. This foundational sector continues to deliver, and we expanded our market presence in this high-value segment. We reported our 11th consecutive quarter of increased revenues and our 10th consecutive quarter of gross margins above 50%. As we committed, we are being judicious with our spending. First quarter operating expenses declined on an absolute basis by 11%, and the ratio of operating expenses to sales was 91%. Both metrics are a testament to our ability to grow revenue and margins while strategically managing costs, a feat not easily accomplished in any company. If you would refer to slide four, we believe this quarter was an early indicator of our capabilities and of our upward trajectory as we approach break-even on an adjusted EBITDA basis. We remain highly committed to our core business in the specialty crop markets. However, given the market size and global reach, seed and soil applied products in the major row crops represent a tremendous opportunity for us. We have been serving this market for just over four years and have grown our offerings from one product to five. We are launching four new products this year, three of which are seed treatments, and all four of which are targeted for use in the broad acre row crops. The good news is that we have an established material presence. The better news is that the opportunity ahead of us is larger than what we've already achieved. Sustainability is at the core of our mission at MBI, and our seed treatments are a big part of that story. Since our inception, We have been at the forefront of the advancement of biological solutions, which today account for roughly one-third of all the active ingredients used in agriculture. Our distribution partners and growers rely upon us to provide products that deliver industry-leading performance and returns on investment. However, now more than ever, they also expect us to supply products that advance sustainable agriculture practices. To that end, we commissioned a climate impact study of our nematicide seed treatment, which we made public on May 6th. A summary of the results is illustrated on slide 5. We are extremely pleased to report that our seed treatment reduced greenhouse gas emissions by more than 85% in soybeans and corn when compared with conventional pesticides. Conservatively, For each million acres of soy or corn treated with our product, more than one million pounds of carbon dioxide emissions are reduced. This is equal to the amount of carbon sequestered by nearly 600 acres of U.S. forest land. Not only is our seed treatment better for the environment, it is also safe for humans, pollinators, and aquatic life. MBI has been and will continue to be a key player in sustainable agriculture. This study is further proof of our contribution toward producing food that is safe for the environment and beneficial organisms while serving our customers' needs. The foundation for our growth, now and in the future, is the increasing demand for food that is produced with sustainable agricultural practices. MBI is uniquely positioned to meet this need and consequently drive our growth and profitability, which will be rewarded in the marketplace and thus to our shareholders. With that, I'd like to turn the call over to Sue.
spk06: Thank you, Kevin, and good afternoon to everyone on the call. If you want to turn to slide six, our performance year-to-date gave us confidence to raise our outlook for 2021. We have increased our revenue growth forecast to the upper 20% range, in line with our historical revenue CAGR. In addition, we have raised our annual growth margin target to the upper 50% range, which also reflect more positive outlook for the year. We expect to keep operating expenses flat while ramping up revenues and the margin. If you want to turn to slide seven, let me point to some key results from the first quarter. Revenues were 11 million, a 14% increase from the first quarter of last year. And in line with our sales growth in 2020, we increased our sales in specialty crops such as fruits and vegetables, and this expanded market use was the key driver of the growth in the quarter. Gross profit increased at a greater rate than sales, benefiting from an improved absorption of manufacturing overhead at our Michigan plant, plus a favorable mix of high-value products. We delivered a 25% increase in gross profit to $7 million and a 540 basis point improvement in gross margin to 63.1%. In addition, we have started the year with a firm handle on costs. Operating expenses declined 11% to $10 million from $11.2 million in the first quarter of 2020. 75% of our total expense reduction came from operational efficiencies. The other 25% was related to limited travel and on-farm visits because of COVID. As the restrictions are lifted, we expect these travel expenses to return to normal levels going forward. That said, We are committed to holding operating expenses at the 2020 level plus inflation. The first quarter net loss was $3.3 million as compared with net loss of $7 million in the first quarter of 2020. Adjusted EBITDA was a loss of $1.2 million this quarter as compared with that loss of 3.7 million a year ago. This was significant progress when compared with the first quarter of last year. An improvement in the net loss of 53% and in adjusted EBITDA of 68%. Cash used in operating activities improved by 1.3 million in the first quarter as compared with the use of cash in the first quarter last year. This improvement was driven largely by the reduction in the net loss and the efficient use of working capital. I want to remind you that we're in the midst of one million upgrade of our manufacturing plant with the projected two-year payback. As Kevin noted, we have a clear line of sight to bring MBI into a positive adjusted EBITDA position through a combination of a robust sales growth, strong growth margins, and disciplined cost management with sufficient cash to fund the company's ongoing operational needs. In addition, We continue to pursue strategic accredit acquisitions that could accelerate our growth even faster than our base case. We're pleased with the start to the year and confident in our ability to deliver greater value to our shareholders. I'd like to turn the call over to Maddie now to discuss our commercial outlook.
spk10: Thank you, Sue. And it's a pleasure to be a part of this conversation today. As Kevin noted, the market for seed and soil applied treatments in the major row crops and broad acres is an exciting growth opportunity for us. The global seed treatment market is forecasted to grow at approximately 12% CAGR through 2025. Our growth rate, however, in revenues from seed treatment over the past four years has been more than double of that the industry has had. And we expect our outsized growth in this area to continue. We are offering the right products at the right time. In four short years, we've expanded our seed treatment portfolio from one product to five products. We expect MPI biological seed treatments will be used in approximately 11 million acres of soybean, corn, and cotton in the United States this year. In Europe, we anticipate more than 24 million acres of corn, sunflower, and rapeseed will be treated with products based on our UBP technology in the 2021 planting season. If you would now turn to slide eight. We're launching three new seed treatments in the EU market. Optima, Takla, and Impact. All of these products have demonstrated significant returns on investments coupled with a favorable environmental profiles. These products promote nutrient uptake, encourage root development, and improve crop quality and yield. As an example, Impact is a product designed specifically for the use in cereal crops such as wheat, rye, and barley. This product gives the crops the head start to the growing season by promoting early establishment, overwintering capabilities, and overall plant health. Now, cereals are the largest crop segment in Europe with more than 100 million acres planted annually, and this is an exciting market expansion opportunity for us. Our seed treatment portfolio is always evolving. and we're continually developing next-generation products that offer new levels of efficacy with better returns for our customers. The long game in seed treatment is not just to get one acre, but to have multiple synergistic seed treatments on each acre. One such product in our pipeline is MBI-306, an enhanced version of our current insecticide and nematicide products offered as a seed treatment. Our research shows MBI-306 provides the same excellent level of protection against target pests, but at reduced application levels. We're currently wrapping up the work necessary to make the appropriate regulatory submissions, as well as refining the fermentation and formulation work. This has the potential to be a blockbuster product that could add an estimated incremental $50 million in peak annual revenues. And we're also introducing another plant health product, Pagesetter, in the United States this year. Sales are underway now in advance of the product being applied in the May to July timeframe in soybeans, corn, and cotton. Paste Center is a foliar treatment that improves overall plant health and crop vigor, and the result is increased yields and a six to one return on investment for growers. We've added distribution in key growing areas for these crops and are in testing with other potential partners to expand our distribution for 2022. If you would now turn to slide nine. This is a preview of what's to come for MBI commercially. Our demonstration program is extensive, and we will conduct more than 300 trials around the world this year. We will be testing both crop protection and crop health products in both foliar and seed treatment application. The geographic split is roughly 50-50 between North America and the rest of the world, with one-quarter of the trials slated for South America. The Latin American market is a wide-open opportunity for us. Demand for biologicals is increasing in the region, with an estimated market value of $1 billion and a projected CAGR of 11%. South America, of course, is well known for its extensive soybean, corn, and wheat production, as you can see on slide 10. The current outlook for increased planted acreage this fall reflects stronger yields and higher prices, all of which contribute to the growers' economic health. We have been working actively with some of the large seed companies in Brazil to demonstrate the efficacy and novel position of our seed applied biologicals, and we already have some orders in hand. Our most recent large-scale winter corn data from the Safrania season shows that we're extremely competitive in the region with plant health products, as well as our biopesticide portfolio. In other parts of Latin America, we continue to work with key regional partners to expand existing agreements and open new ones. Last fall, we announced the partnership with Rhizobacter to distribute our leading foliar plant health products, which they sell under the brand name Vitagrow. Through this arrangement, we would expect to see more than 1 million acres treated already during 2021. Strong planting prospects for winter crops, such as wheat and barley, should allow us to drive further demand going into 2022. Now, PTG Rites and Seeds is another key distribution partner in Latin America. PTG is already treating most of its forest crop seeds with our pro-farm technology. We had a successful launch event for UPB Technology plus Semptium Pro during the first quarter, and we will be expanding this premium seed treatment in multiple crops in Uruguay. To conclude, the agricultural forecast is for more exports and lower-ending stocks this year, which in turn feeds higher prices and bullish forecasts for planted acres. We are in a fortunate position to be launching multiple new products in this environment. We are doing so while simultaneously expanding our global footprint, all of which allows us to increase our revenues at a faster pace than the ag industry as a whole. With this, I'd like to turn the call over to the operator now for your questions. Thank you.
spk01: Thank you. Everyone, to ask a question, please press star then one on your telephone keypad. If you're on a speakerphone, please pick up the handset or depress your mute function to allow that signal to reach our system. Again, that is star one to ask a question, and we'll go first to Samir Joshai of HC Rainright.
spk09: Good afternoon. Thanks for taking my questions. Congratulations on a good quarter. You have this metric that you have introduced a couple quarters ago called the operating expense ratio. It is nicely trending at 91%. How, in terms of operating leverage, What level of how low can this go?
spk08: Hi Samir, it's good to talk to you again. It's Kevin here. So in terms of our operating expense ratio, it's an indicator to us of our gross profit trajectory. So in terms of how low can it go, we continue to see are operating expenses trending at 2020 plus inflation. And we're very fortunate in that at that level, we believe we can continue to drive the growth, the top line growth in our company in the upper 20s and our gross margin rate in the upper 50s. And so for continuing operations, we feel that baseline is sufficient for us to move forward. I would say that if we see an opportunity to invest in the company that will drive up our operating expenses, that will drive our revenue and our gross margin faster, we'll certainly take advantage of that opportunity. But in terms of how low can that ratio go, the faster we drive the top line, Samir, the lower that number is going to go. And our objective is to make it as low as we can as quickly as we can.
spk09: Understood. And in terms of gross margin, you're targeting upper 50%. You already have two consecutive quarters of 63 plus percent gross margins. Are you expecting some margin pressure in the next few quarters, or are you just being conservative and careful in terms of guidance?
spk08: Yeah, thank you, Samir. It's Kevin again. So we've had a few quarters where we've gone over 60% and we're obviously very happy with that achievement. When we look out through the business, the fluctuations in the quarters between our products and our geographies, we think that it's going to bounce around in the upper 50s. We may have a quarter where it's a little higher. We may have a quarter where it's a little lower around that 60% range. But when we look out through the entire year, we think the upper 50s is a good spot to target our business at. Samir, I'd remind you that we will have a bit of a headwind on our margins, a slight headwind on our margins as we bring our Michigan plant online until we get it up to full operating capacity. That also weighs into our thinking as well. Understood.
spk09: Thanks for reminding us of that. One of the things for the year's outlook includes a potential upside from strategic acquisitions. We are in the month of May now, so it seems that there must be parties that you're talking to who are fairly advanced. Do you have anything that you can share with the street in terms of what kind of acquisitions you're looking at that could materialize in the next whole five months.
spk08: Yeah, thank you, Samir. Kevin again. So as we've mentioned in previous calls, we believe the market is quite fragmented and there is an excellent opportunity out there for consolidation. I can also say that we are very active in terms of talking to potential partners for us moving forward. And they're in all levels of or stages of discussion. At this point, we don't have anything at an advanced enough stage that we would report it. But I can certainly tell you that we're active. We're having some very interesting discussions with a number of different players. We see lots and lots of great opportunities. And I think it's going to be a matter for us of deciding which one do we want to chase, when and what sequence. But it's been a fun discussion. Nine months, I'd say, in terms of getting to know the industry better and seeking opportunities for us to accelerate our growth. Understood. I'll take the rest of my questions off now. Thanks a lot. Thanks, Samir.
spk01: And our next question will come from Ben Khalifa of Lake Street Capital Market.
spk00: All right. Thanks for taking the call. Hey, Kevin, thanks for taking my questions and congrats on a good quarter, especially on the bottom line here. A few questions, one on the quarter and then a couple big picture questions. My quarter question is, I'm trying to understand kind of the seasonality of your row crop business in North America in terms of first and second quarter breakdowns. Can you help me understand kind of the percentage of revenue recognition you expect in this market from the first quarter to the second quarter, and how maybe that number has evolved and where you think it's going to go? I just don't understand the seasonality of this business as well as I should.
spk08: No, Ben, it's a very good question, and thanks for asking it. I'll speak in generality and then comment a little bit about how things flow, at least the way we see it. So in terms of row crop, we start the season out with our seed treatment business and that goes on obviously at the very early stage of the cycle. So that can happen for us in Q3 and into Q4 in the northern hemisphere as we're getting ready for the planting season. And then while that's all going on into Q1, that becomes a big West Coast market for us right now in terms of taking care of the specialty crops, the trees, the fruits, the nuts, the vegetables. And then as we move into Q2, then we go back to row crops, Ben, in terms of our foliar and soil-applied treatments. And on top of that, it fluctuates depending on our customers' mood in terms of Do they want to bring some product in early to stock up? Are they looking to wait a little bit longer? And I'd say, Ben, right now, we're certainly seeing good demand early for our products going into the row crop season. Of course, we're having excellent prices and the entire industry forecasting great crop input demand. So it's a bit tricky between Q1 and Q2, Ben, and I'd say Q3 and Q4, but That's about how we see it. I'm more than happy to give you more color on that if that didn't answer your question.
spk00: No, I mean, that was helpful. I appreciate there's a lot of variables kind of, you know, working against each other at the same time. So that was helpful. A couple other big picture questions. You talked about the Latin American row crop opportunity, obviously a huge addressable market for you all. I know you're still in the relatively early stage here, but I'm wondering if you can talk about the contributions that this market had to your revenue in, say, 2020 and your expectations for that market this year and next on a percentage basis.
spk08: Yeah, Ben, thanks. Great question. So I'm going to hand it over to Maddie in a second, but I can tell you that we are extremely positive about our potential in that market. We've got a great foundation in terms of our partners, our distribution partners, as Maddie mentioned, with Rhizobacter and others. We've got, I'd say, a healthy amount of field trials going on. We feel we've got a pipeline that fits to get into the market there, not only in the specialty crops where we've had our history, but really getting on the wheat, corn, soybean acres in that market. With that, Matty, I'll hand it over to you. This is one of your areas of greatest passion, so I'll hand it over to you to provide Ben with some more commentary on Latin America.
spk10: Thanks, Kevin, and thanks, Ben, for the questions. Matty here. Kevin is right there. I think the Latin American market as a whole is one of my favorite charts. And there's many reasons. One is that it's, of course, very big in terms of ag, but it's also very professional and, you know, very pragmatic. But as we've worked there already for a few years in terms of product development, and we've been working directly with our hopefully, you know, future partners, I would say that right now we're at the breaking point. We're at the breakthrough point. So we have some big partnerships that we've laid out, like the Rhizobacter one, but we for sure will have some more to come in the very short future. So it's taking some time, as it always does. We worked through to demonstrate that both our biopesticides and our plant health products are not only competitive, but actually we're talking very competitive and good value for the growers and the whole channel in the market. And how we see the markets is that Brazil is a market of its own, and then you've got the rest of Latin, but it definitely is something to look forward from all aspects. And as said, we've been working there now long enough to be confident that we've got all the tools to break through in the very short future, specifically with our row crop products. both in seed treatment and foliar.
spk00: Got it. That's helpful. Thanks, Manny. One other question from me, and then I'll get back in queue. You talked about the carbon sequestration of the nematicide product, and I'm wondering about kind of a big picture question here. You know, do you have studies like this across your product portfolio that really, you know, show the environmental benefits of the products from a carbon sequestration you know, such that maybe your customers would have an easier access to the carbon markets, you know, as they, you know, hopefully emerge here soon?
spk08: Ben, hi, it's Kevin again. So we've spent, you hit on a very active topic in Maroon. We've spent a lot of time talking about sustainability and, of course, the impact that our products can have and do have. And so being a science-based and a fact-based company, we wanted to have data, right? Because we believe we are contributing positively, but show me the numbers, show me the independent assessment. So we went ahead and engaged with Boundless to do the study that we reported on. Extremely happy with the results. We got a 9.8 out of 10 and very, very pleased with the results in terms of carbon sequestration, greenhouse gas reduction by using our product. And so that's given us the confidence, Ben, to continue down that path. We think that our 306 product that Maddie mentioned is going to score extremely well in that study as well. And as we move forward, that's our intention is to continually provide data to our customers and to the market in terms of what benefits our products have, not only obviously they have to work, right? First and foremost, they have to work, they have to be efficacious, they have to provide a return for the grower. But in our opinion, when we can add to that a fantastic sustainability story, we're really excited about that combination.
spk03: Got it. That's helpful as well. Okay. I appreciate you taking my questions. I think that does it for me. I'll get back in queue. Thanks, Ben.
spk01: Our next question will come from Bobby Burleson of Canaccord.
spk12: Yeah, good afternoon. Hi. Hey, Kevin. Thanks for taking my questions. So nice quarter, especially on the profit line. I'm curious just in terms of as your revenue mix and your products start to shift more and more or continue to shift more and more to row crops, and seed and soil treatments, what kind of the long-term gains in maybe operating expense efficiencies there might be out there? Just fundamentally trying to understand how much more efficient spending in that area is versus specialty crops.
spk08: Great question. So, Bobby, to be completely honest, blunt and it's not a secret, we're subscale, as many in the industry are. We built a platform here in this company that we can grow into, and I'm very fortunate to our investors and to Pam for building this platform. And certainly, as we move into row crops, getting on those massive acres in North America and Europe and Latin America, it allows us to get to scale. in terms of our production capacity, in terms of utilizing our people, in terms of all the infrastructure that is around this company. So, you know, as Sameer asked at the beginning, that kind of growth on the top line will drive down that operating ratio, OpEx ratio, and make this company more profitable. So, yeah, the... the more we focus and drive that top-line revenue while maintaining the infrastructure we have, which is right size for the company, is going to certainly go right to the bottom line.
spk12: Okay, great. Thank you for that. And then just a follow-on to the previous caller's question on that positive result we got from the recent greenhouse gas reduction study. Curious what kind of proactive next steps there are. I understand that you can move ahead with similar studies on other products, but is there a larger kind of marketing package that you start to put together or are there groups that you are more vocally a part of to kind of proactively move your customers in your direction, the industry in your direction? How does that work?
spk08: Yeah, Bobby, we've spent quite a bit of time. It's Kevin again. We've spent quite a bit of time talking about now what? So we have this great result, fantastic reduction in greenhouse gas by using our product. And so Who do we need to market that story to? Obviously, growers and obviously our distribution channel partners, but who else, right? So should it be the major food companies around the world, industry groups, consumer associations? So you asked a great question, and the short answer is yes. We will be making a concerted effort to get the message out and right now our thinking is that net is going to be quite wide in terms of who do we talk with. So we're very fortunate. Keith Pitts is our Chief Sustainability Officer, and he is spending the vast majority of his time right now working on this whole sustainability story for us because we think it's important for a number of reasons. Obviously, first and foremost, the good that we do or the benefits the benefits we can provide with our products. But I think we want to be, or I know we want to be one of the drivers of getting that message out in the industry and talking about the features and benefits of ag biologicals in general. So it will be a bigger and bigger part of our work here in Maroon Bio.
spk12: Great, great. Maybe a TikTok channel. Something more Gen Z friendly.
spk08: Exactly. We're lucky we've got a lot of those folks in the company that are much better at social media than I am, Bobby.
spk12: Yeah, I've got like 10 thumbs. Well, thanks again for the additional color.
spk04: Appreciate it. Thanks, Bobby.
spk02: And next we'll go to Nathan Weinstein of Agus Capital.
spk11: Hi, Nathan. Hi, Kevin. Hi, Sue and Maddie. Thanks for taking my question. So I used to see continued progress in the business and I suppose that inflation has been a big topic recently. Just maybe a broad take from you on what you're seeing in agricultural industry from your own business or your customers in terms of inflation.
spk08: Yeah, Nathan, that's a great question. I mean, there's no doubt that prices of everything have gone up and there's no shortage of funny social media posts about lumber prices to start with. But in our industry, obviously, higher grain prices is driving higher input costs. But we still think that the economic situation of the grower in general is in very good shape. Prices are fantastic. And so while you're seeing inflation in the input side, I don't think that it has overcome the positive effects of the prices, commodity prices in general. From our side, Nathan, I imagine you're thinking, do we see any effect on our business? At this point, Really, we're feeling a pretty good tailwind. We think that the high crop prices are going to drive a lot of crop inputs. We are going to see healthy planted acres around the world. We believe that that will serve to empty out the distribution channel this year and set us up really nicely for 2022 with a restock and going to the market in the coming year with strong demand. certainly when our grower customers are doing well I mean it's well everybody in the industry does well so I'd say at this point while there is inflation across almost everything you can think of I still think we're in good shape at least from our perspective we're not feeling any negative impact at this time oh great good to hear
spk11: And then another topic that's been in the news lately is New York legalizing marijuana. And maybe you can speak about your cannabis business. Any perspectives on that part of the business?
spk08: Yeah, Nathan. So, as you know, we have a large number of our products that are certified organic products. And so they fit extremely well into that market, in any organic market, including cannabis. And I'd say we think about it as a regular part of our crop portfolio. We think we have a great fit there, as we do in any organic product. But we don't spend an inordinate amount of time focusing on it. We think about it as the same as any of our other organic crops. And I think that the As that market continues to grow, we expect to get our unfair share of that growth.
spk11: Great. Okay, very nice. That's fair. So I just wanted to close actually with a comment. I was going to ask a sustainability question, but a couple of the other analysts got to it. And I think that's a positive thing because I think that the sustainability aspect of Maroon should be a top of mind in the dialogue around your company. So it was good to hear all the interest on that front.
spk08: Yeah, thank you, Nathan, and thanks for taking the time to join the call today.
spk01: And with that, that does conclude today's question and answer session. I would like to turn the call back to our speakers for any additional or closing comments.
spk04: Yeah, thank you, Operator.
spk08: We appreciate everybody's time today and your interest in MBI. Our strong start to 2021 has given us the confidence to raise our forecast for this year and to a time when we believe we will cross-break even on an adjusted EBITDA basis. The strength of our commercial offerings globally, coupled with a continued focus on cost management, will be key to our continued success and our ability to provide greater returns to our shareholders. Thank you, and we look forward to speaking with you again soon.
spk01: And with that, everyone, that does conclude today's call. We'd like to thank you again for your participation.
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