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spk06: Ladies and gentlemen, thank you for standing by, and welcome to the Maroon BIO Innovations second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and if you would like to ask a question during that time, simply press star 1 on your telephone keypad. If anyone should require assistance during the conference, please press star 0. I would now like to turn the conference over to Ms. Linda Moore,
spk07: general counsel please go ahead good afternoon everyone and thank you for joining our call welcome to the 2021 second quarter earnings conference call for maroon bio innovations our presenters today are ceo kevin helash and cfo sue chung and they will be joined for the q a by kevin hamill chief manufacturing officer maddie tianan senior vice president of international sales and Amit Vasavada, Chief Technology Officer and Senior Vice President of Research and Development. 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?
spk03: Thank you, Linda, and thanks to everyone joining us on the call today. If you would turn to slide three, when I joined the company 12 months ago, I outlined what we believe to be a clear path to profitability. Core to this were three themes. One, accelerating our top line growth with brand extensions and global expansion. Two, leveraging our pipeline to bring novel, efficacious products to the market that create the greatest returns for all stakeholders, and three, being brilliant at the basics of running a company with a keen eye on operating expenses and cash flow. I'm proud to say that the team has made significant strides on all three objectives. The discipline, focus, and strategic mindset that permeates the MBI culture has allowed us to proactively manage challenges we face in the second quarter while staying the course for our long-term success. Agriculture is never smooth sailing. and our job is to ensure we ride out rough waves by being dynamic and flexible, ready to adjust course, while remaining committed to staying on track to deliver on our targets. The second quarter was a test of our ability to manage the unexpected and control our controllables. If you would refer to slide four, our revenues grew 3% in the second quarter. but were down versus our expectations due to several external headwinds. The widespread drought in the western United States, combined with supply chain and COVID-related challenges in Europe and Latin America, brought more pressure to bear on our sales growth than we had originally anticipated. Despite these challenges, we once again delivered strong gross margins and prudently managed our operating expenses. Our ending cash was up, and our adjusted EBITDA improved significantly. The end result is we've managed our business to hold the line on the bottom line. We are highly confident in our platform. We're in the right markets with the right partners, delivering the right products to meet our customers' needs. I'd note several recent proof points. First, as we show on slide five, we continue to benefit from diversification of our portfolio and our strategic emphasis on row crops in particular. Strong global demand for corn and soybeans have depleted inventories in the distribution channels in key growing areas. As a result, the outlook for the 2022 growing season is strong, particularly for our seed treatments. Underlying the near-term demand is a longer-term shift to more sustainable, high-performing products, which is the heart of the MBI portfolio. Second, as shown on slide six, we have forged partnerships with many of the most influential players in agriculture. We supply the top distributors in North America and have excellent relationships with leading distributors in Europe, including Corteva. We also recently announced an expanded agreement with Rhizobacter, one of the largest distributors in South America, to represent our biological seed treatment for nematodes, and soil-dwelling insects in Brazil. This provides us with an excellent opportunity to participate in the billion-dollar Brazilian seed treatment market by 2024. Third, our four new product launches are progressing on track, as we show on slide seven. In the United States, we are very pleased with our first-year sales of Pacesetter and expect to be on 250,000 acres of corn and soybeans this year. This is a fantastic start and a great platform from which to build upon. In Europe, we're seeing strong demand from our channel partners for Optima, Takla, and Impact. We expect these three products to quickly become material revenue and profit contributors. We've also highlighted our bioherbicide platform on this slide. We believe the market demand for a bioherbicide is phenomenal. and we remain committed to bringing a viable solution to our customers in the near term. I'm pleased to say that we have had some exciting breakthroughs over the past year that have the potential to materially advance our herbicide program. At the same time, we've made fantastic progress with MBI 306, our next generation seed and soil treatment for insects and nematodes. As we move this project toward regulatory submission, It frees up research and development dollars and resources to be redeployed to other projects, like our bioherbicides. This is great news on multiple levels, and we hope to provide updates on both platforms in the coming quarters. Also on the R&D front, we announced a new collaboration with Terramera earlier today. Terramera's novel technology platforms will combine with our powerful screening and bioprocessing capabilities to enhance our product performance and accelerate time to market. This is a model partnership for us and part of our ongoing effort to tap into new advancements that will complement our strong R&D pipeline. Finally, if you would turn to slide eight, our Michigan manufacturing expansion project is progressing on budget and on time. We passed a major milestone in July by successfully producing our venerate product at the facility for the first time. The quality of the product is excellent, and our capacity utilization is ramping up in anticipation of growing demand for this product. By the start of the year, we will be switching to a 24-7 production schedule to meet the demand of our products. This is a testament both to the value we create for growers and to the expanded capabilities of the manufacturing teams. The first half of the year is behind us now, and we can't replace all of the lost revenue in the second half. However, we are in this game for the long haul, and I firmly believe our first half revenue does not reflect the momentum we're building, nor is it indicative of our ability to grow the business through the remainder of 2021. Looking forward, I continue to foresee that we'll be on track to deliver historical top-line growth in the second half of 2021. while maintaining our strong gross margins and delivering upon our commitment to continuously improve our bottom line quarter over quarter, year over year. Slide nine illustrates how we will bridge revenues for the year. Sales into the U.S. specialty crops are expected to contribute 45 percent of the second half growth. We expect a normal progression as product moves into position in the distribution channel as we complete the second half of the year. Another 25% will come from seed treatment sales in the United States. Again, following a typical pattern so that product is ready for use for the upcoming 2022 growing season. One quarter of the growth will come from seed treatment sales internationally. In Europe, disruptions in the supply chain and distribution channel delayed sales originally forecast for the second quarter. By year end, we expect to recover much of those sales. In Latin America, we anticipate some easing of COVID-related restrictions that have slowed outreach to growers. We anticipate this, along with strong commodity prices and low channel inventories, will translate to increased demand going into the 2022 growing season. The final 5% comes from growth in our Central America sales for specialty crops. As in the first half, we are seeing good response to our products in this world area, and this is a good contributor to our international growth in specialty markets. A disciplined approach to operating expense management remains key for this company, and we have a relentless focus upon running a highly effective and efficient organization at all levels. The end result is that we are able to reduce our operating expenses without jeopardizing our ability to invest in our key growth initiatives. As you would expect, we are carefully managing our use of cash in light of our revenue expectations this year. Our objective is to achieve adjusted EBITDA breakeven through new product launches, global expansion, and broader distribution backed by a robust R&D pipeline. As we have demonstrated through the second quarter, We can effectively manage near-term disruptions, maintain our momentum, and advance our long-term strategic advantages. With that, I'd like to turn the call over to Sue.
spk08: Thank you, Kevin, and good afternoon to everyone on the call. If you want to refer to slide 10, there are two trends that support our commitment to achieve positive adjustment EBITDA. we continue to deliver strong growth profit and growth margins. And second, we continue to effectively manage spending. As a result, you can see a positive upward trend line emerging with adjusted EBITDA. Our second quarter revenues of $12.6 million marked our 12th consecutive quarter of revenue growth. The pace of gains we made was somewhat offset by market conditions and supply chain and COVID-related challenges. Our product mix continues to move in a positive direction. This is reflected in our gross profit and gross margin. The gross margins were 61.7% for the second quarter, and 62.3% for the first half, although mixing any given quarter might shift the gross margins. Overall, this margin strength is driving our continuous improvement at the bottom line. Our commitment for the year was to hold operating expenses flat plus inflation. We're right on track with that commitment both for the second quarter and the first half. We show on slide 11 operating expenses in 2020 benefited by 1.4 million PPP loan. Excluding this benefit, 2021 operating expenses would have been lower by 6.5% for the second quarter and 8.6% for the first half. Gross margin expansion and cost management flowed through net loss and adjusted EBITDA. Excluding the PPP loan balances, our net loss of $3 million in the second quarter would have been 29% better than the set period last year. For the first half, the net loss of $6.3 million would be a 44% improvement. The continuous favorable adjusted EBITDA results shows a clear picture of our progress, with a 51 percent improvement in the second quarter and 63 percent improvement in the first half. We believe this type of financial performance is a strong indicator for future growth. Reduce the net loss and positive changes in working capital contributed to the 19% improvement in cash using operations in the first half. As Kevin noted, we continue to carefully manage both operating expenses and cash usage. We believe that we have sufficient cash to fund our ongoing operations and support our growth prospects. We're well-positioned to deliver solid operating results through the remainder of the year. We expect to continue our revenue growth, strong growth margins, and a careful cost management to make meaningful improvements in our adjusted EBITDA and operating cash. Our course remains unchanged, and we're following a clearly defined path to reach profitability. With that said, I'd like to turn the call back to Kevin for his closing remarks.
spk03: Thank you, Sue. Before we go to your questions, if you would turn to slide 12, let me summarize our outlook for the remainder of the year. We have built a strong and geographically diversified customer base combined with a broad product portfolio. As we move into the second half of the year, We are working with our Latin American customers to prepare for their planting season where we expect solid demand for our products. In the northern hemisphere, our customers are now planning for the 2022 season and, as is typical for this time of year, we are gearing up to supply them. We have a good line of sight as to product movement and to how our channel partners are positioned for the coming year. This gives us confidence in our ability to aggressively grow sales in the second half while maintaining our strong margins. Our cash position is solid and we'll continue to invest in growth while prudently limiting discretionary spending. We are well positioned to reach adjusted EBITDA breakeven, and I have to give our team full credit for effectively managing through a challenging first half of the year while keeping us on our path to profitability. We have created a unique leadership position in sustainable agricultural solutions, and we are poised to accelerate from here. I'd like to turn the call over to the operator now for your questions.
spk06: Operator? Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We have your first question from Ben Clive with Lake Street Capital Markets. Your line's open. Hello, Ben.
spk09: Hi, Kevin. Thanks for taking my questions. First, got a couple for you regarding one of the comments you made in your prepared remarks when you noted that there was, and I'm sorry to put words in your mouth here, but something to the effect of there was revenue that you expect in a Q2 that was going to get pushed into Q4 on the seed treatment side. First, can you quantify that at all for us? And then second, How should we really think about that? It doesn't seem to be that it's going to be revenue that's going to be able to be made up. It's just revenue that isn't going to be realized in this season is my initial take. Maybe I'm wrong. Can you help us understand the scale of that push out and how we really should think about whether that's revenue that's missed or revenue that's just pushed out?
spk03: Here's the way I would characterize it. Q2 for us is very busy, right? We work right up until the end of the month pushing sales out to the door and meeting customer needs. We had a sizable PO that we were anticipating getting out in Q2 that slipped into Q3. You know, some of it may end up in Q4. But the way I think about it is we think or are forecasting the second half of the year to be more or less on track with how we've trended over the last several years in terms of our growth. And then if you add on the Q2 to Q3 shipment in there, it's gonna bump it up a little bit more. So we're not anticipating its loss revenue, Ben, it's just shifted between quarters.
spk09: Okay, so that's for, that's seed treatment for product that's gonna get planted next spring. That wasn't seed treatment for product that you had hoped would get planted in the spring of 21. That's correct. Okay. And then second, I'm wondering if you can kind of get a bit more granular here on some of the, you know, especially the COVID-related headwinds that you guys faced. I mean, really, what was this? Was this a, you know, an inability to access raw materials? Was this, you know, transportation that you failed to secure? You know, what was it? What were these headwinds exactly? Okay.
spk03: Yeah, Ben, so there's a few that I would say are noteworthy. Certainly on the supply chain, getting raw materials in our production facilities in time to meet demand had some impact. Definitely our ability when you're launching new products to get out on farm, do the demo trials, do the belly-to-belly training with our customers was impacted as well. And I'd say Those are the two big ones, but I'll ask Matty and Kevin Hamill to chime in if they have any additional commentary.
spk02: Yeah, thanks. That's a good question, and I think, Kevin, you covered most of it, and as was mentioned, getting the raw material has been definitely, I'll let Kevin Hamill shed some more light to it, but for us basically being able to fulfill the POs on time, but as mentioned here, I mean, Luckily, the majority for it is for planting season 22 that got pushed for Q3 and then some of it also to Q4, but it's still going on the seed next year. At the same time, Kevin touched base there. I think that we saw some impact from the channel. I mean, of course, COVID hasn't disrupted only us, but there has been some countries that have been more affected than the others and some regions that have been more affected than the others. And that affects the whole channel, being able to do this work. especially when you're launching new products and putting them through the channel. So I think the good news within all this is that we've experienced no client churn. There has been nothing fundamental negative happening among our clientele or the demand for our products, but it's really been tied up to this year and how the channel and supply chain works.
spk01: Yeah, I'll just, this is Kevin Hamill. I'll add a little bit to what Monty and Kevin Hila said. Yeah, I agree that there has been significant supply constraints this year. Short supply, longer lead times, raw material, price increased pressure. Monty talked a little bit about some seed treatment push delay for in terms of selling it, but not in terms of getting it on ground. In terms of the bioprotection products, which are a little bit more in terms of timeliness, we were able to meet all the customer demand in second quarter. However, it took a lot of resolve from the supply chain, you know, to minimize those raw material price increases and also make sure that we are multi-sourcing raw materials to continue production. So both as Kevin Helash and Mati said, we don't anticipate Any supply constraints coming in the third quarter and fourth quarter as we finish up this year?
spk09: Okay. Fair enough. There's plenty more to talk about. That's probably a good place for me to leave it. Thanks for taking my questions, and I'll get back in queue.
spk06: Thanks, Ben. We have your next question from Edwin Rodriguez with Jefferies. Your line is open.
spk05: Thank you. Good afternoon, guys. A quick one. I mean, Kevin, you've talked about, I think, inventory levels in the channel in Latin America. Can you talk about what you've seen in all the major regions, like in terms of like the inventory levels, like in the channels in the U.S., Latin America, and Europe?
spk03: Yeah, I'm going to – I'll take a first crack at it, and I will hand it back over to Maddie. But I'd say that our customers – started out in the first quarter anticipating strong demand backed by the commodity prices around the world for the major crops. And then I'd say in the second quarter, they definitely were keeping a keen eye on their inventory levels. And I would say overall for us and for our product categories and our product inventories, They're in good shape, and we're certainly expecting a strong restock in the second half of the year. Matti?
spk02: Thanks, Kevin, and thanks for the question. So I echo what Kevin said. I think what we're seeing, and here it's again region by region and, of course, by category. So if we look at the seed treatment business, we see some records being broken in South America in terms of planted acres. We assume also that the seed There's some drought going on, so the treated seed pressure is going up, so that's going to be good for seed treatment. Also in Europe, things are pretty stable looking at next year. In terms of the channel for foliar products and crop production, I think that there we're seeing slight optimism, which is driven by high commodity prices. And again, depending on the region, if you look at South America, for example, where we've launched some new products and made big partnerships recently, farmers have really been able to clear out some debt in the past year or so after a couple of the bad seasons that they suffered. So we expect that to turn into higher demand going forward. And, I mean, just recently we are hearing some positive thinking from the channel that, you know, the life is going back on track and the vaccination programs are kicking in. People are meeting more. more face-to-face, but that still doesn't mean that COVID is over or that we would be fully back to normal. But in general, there is slight optimism in the air, and when it comes to inventory levels and the channel, I don't think that's the biggest, or it's not a concern at the moment. Let's put it this way.
spk05: Okay, that makes sense. And I have a quick one on the seed treatment business. I mean, you're doing extremely well there, like for the major row crops. you've had outsized growth there. How long do you think you can sustain that outperformance? Is this something that can go on for the next four or five years? Essentially, how long do you think you can sustain the outperformance in the seed treatment business?
spk03: Great question, Matthew. I'm going to hand it to you in a second. My quick comment is, We're just scratching the surface. If you think about the acres that we're on with the portfolio we have, what we have coming through our pipeline, including MBI 306 for our nematicides and insecticides, plus I'd say a robust pipeline through the pro-farm line, we see, as I said, we're just getting going in terms of being on acres globally as a seed treatment. Matty, this is your heart and soul. I'll leave it to you to add further commentary.
spk02: Yeah, thanks. Thanks. And that's another great question. And I think this is something that, of course, we ask ourselves all the time. But at the same time, it's something that we're, I mean, as Kevin said, we're just getting started. And why we ask this question all the time is that we ask that which products can we put on the platform of seeds. And I think our combined experience and the current acres is a testament to it, that we're now getting that real proper footprint in the industrial seed treatment business. We're only now accessing the downstream and the midstream businesses through other partners. But at the same time, we have a pipeline of, you know, we're launching four new products this year, but we still have a pipeline of many more products to come that we've carefully designed to, A, be on the same platform of seed treatments, so basically find the synergies between the products, but also deliver that real value to a market that is still developing. So we have to, at the same time, remember that seed treatment as a business is relatively new, and it's outpacing growth a lot of the other markets in ag, And there is certain fundaments to seed treatment that we understand very well, how to bring products that perform at the right dose rate that are compatible with other products that also can survive with the seed for two years so you can store the seeds right. So I think that gives us the credibility, but also then our ability to innovate and put not just A, but put A, B, and C together effectively. for the next five years and really create value from that way. So sorry for the long answer. The short answer would be that exactly as Kevin said, we're just getting started and there's some really, really interesting things coming up on the seed treatment side.
spk05: No, this was very helpful. I'll get back on the queue. Thank you.
spk06: Again, if you would like to ask a question, please press the star one on your telephone keypad. Again, that is a star 1 to ask a question. We have your next question from Edlaine Rodriguez with Jefferies. Your line is open.
spk05: One other question. I mean, can you talk about, like, the competitive pressure you're seeing in the industry? Essentially, like, is anyone getting closer to the scale and breadth of the products that you offer? Trying to get a sense, like, how long you think it might take for your smaller competitors to, you know, to get to your level.
spk03: Mm-hmm. That is a great question, and my short answer is we spend a lot of time looking forward rather than looking in the mirror at Lane. We've got a 15-year head start. We have a fantastic portfolio of products already in the market, commanding shelf space with our distribution channel partners. We've got a fantastic pipeline that is expected to deliver and bring products to the market over the coming years that will bring significant value to us. So we feel very comfortable in our position. We think we're uniquely positioned to retain our leadership position in the market. And I'd say we spend a lot of time thinking about how do we get on more acres rather than worrying about the newer companies coming up and displacing us. With that being said, though, we certainly are looking to a number of these companies that are in the sector now with regard to the potential to collaborate, as we recently today announced with TerraMera, and use those technologies to help accelerate our growth. kind of the way i think about i mean we're in terms of the whole sustainable ag crop inputs crop protection market you know as we talked about in seed treatment we're just getting going and our potential to get on the untreated acre in terms of our products is again absolutely phenomenal and that's what we're spending most of our time thinking about how do we get on more acres with our products how do we make our products uh better from an efficacious standpoint, from an ROI standpoint, yeah, I think, you know, for us, the opportunity remains absolutely fantastic.
spk05: Yeah, thank you very much.
spk03: Thank you, Lee.
spk06: We have your next question from Terry Sweeney with Roth Capital. Your line's open. Hey, Jerry.
spk04: Hey, Kevin, Sue, and team. Thanks for taking my call. Just a, you know, Easy question, or potentially easy, I should say. Can you bucket out maybe how much sales you lost because of some of the drought and in which areas? I'm curious to be able to provide any of that.
spk03: Yeah, well, I mean, the short answer, Jerry, is, you know, we were projecting to be in the upper 20s growth. Like when we started out the year, we got up few months under our belt. So what's happening with commodity prices, lots and lots of optimism out there. So you can kind of, you know, extrapolate that we went from, you know, our previous projections to where we are today. You know, it was a tough spray year in the western U.S. It was very hot and extremely dry so that, you know, the headwind was that, you know, we're looking at preliminary numbers coming out of California. You know, they're not finalized yet, but it looks like spray acres are down about 20%. You know, the good news is that, you know, our spray acres are down about 14%. So we didn't suffer as much as the overall market. But, you know, when it's hot and dry and growers are not seeing fungus pressure or insect pressure, I mean, they're, you know, good on them, I guess, to some sense in that they don't have to spend that money in spray. So a good chunk of it was there. We're still in season, Jerry, throughout the rest of the United States. I mean, we're still going hard in the corn belt on corn and soybeans with pace setter. We're still going in, you know, even in California in the PNW, we're still spraying lots of activity on the East Coast. So, you know, we'll see at the end of the day. But I'd say if you're just thinking about The drought, where were we impacted the most versus expectations, it's definitely the West. Yes.
spk04: Okay, that's what I suspect. And that's a good detail on the market down about 20%. You're down 14%. I appreciate it. Thank you.
spk03: You're welcome, Jerry.
spk06: Again, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Kevin Hillish, CEO, for any closing remarks.
spk03: Thank you. Thank you, everyone, for joining our call. We sincerely appreciate your time and interest in MBI. We've effectively guided the company through a number of near-term external headwinds so far this year. To do so, we had to make use of all the tools available to us to ensure we delivered on the bottom line. We fully expect to return to our more aggressive growth rates and leverage our leadership position as we expand globally. Thank you again, and we look forward to speaking with you.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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