S&W Seed Company

Good morning and welcome to the S&W Seed Company's third quarter fiscal year 2022 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Robert Bloom with Witham Partners. Please go ahead.

All right. Thank you very much. And thank you all for joining us today to discuss the financial results for S&W Seed Company for the third quarter of fiscal 2022 ended March 31, 2022. With us on the call representing the company today are Mr. Mark Wong, President and Chief Executive Officer, and Betsy Horton, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question and answer session. Please note that management will be referencing a slide presentation during this call that is available on the company's website. You can visit the website, www.swseedco.com, Click on the Investor tab along the top green ribbon and you will see the slide presentation available on the front page there titled Strategic Review Key Centers of Value. Before we begin with prepared remarks, a couple of comments here. First off, statements made by the management team of S&W Seed Company during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended. And Section 21E of the Securities Exchange Act of 1934 is amended, and such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results, or strategies, and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually, or projected. It includes statements such as the company's revenue guidance for fiscal 2022 and statements regarding the achievement of the company's business objectives and recent strategic review. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risk that actual results may differ materially from those projected in the forward-looking statements. as a result of various factors and other risks identified in the company's 10-K for the fiscal year ended June 30, 2021, and other filings made by the company with the Securities and Exchange Commission. In addition to supplement S&W's financial results reported in accordance with U.S. Generally Accepted Accounting Principles, or GAP, the company is reporting non-GAP measures during this call, including adjusted margins and EBITDA. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, should be read in conjunction with the company's consolidated financial statements prepared in accordance with GAAP, have no standardized meaning prescribed by GAAP, and are not prepared under any comprehensive set of accounting rules or principles. A description of these non-GAAP measures and reconciliations of non-GAAP to the nearest comparable GAAP measures are included at the end of the company's earnings release issued earlier today, which has been posted on the investor relations page of the company's website. So with all that said, let me turn the call over to Mark Wong, Chief Executive Officer for S&W Seed Company. Mark, please proceed.

Thank you so much, Robert, and welcome on this happy Monday morning to everyone who's on the call today. It's that time of year for S&W Seed, when we book our sales in the third and fourth quarter. And that's because in the Northern Hemisphere, and remember that our offices are in Longmont, Colorado, where I'm calling you from, we are planting like crazy. And then because our business in the Australian market, our other big market is winter planted forage crops. We're also planting forage crops with farmers. And so that's why our third and fourth quarters are always the largest for us. So as Robert said, we have a presentation for you today. You go on the website, please, and get that. And I am going to be referencing slides as I go through the presentation today. It's a little bit or a lot, I hope, of new way of looking at our business for those of you who are shareholders or follow the company. And we're very excited because we think it's a much cleaner way to match our opportunities and our expenditures for the future. So I'll go first in the presentation to slide three. And you'll see in slide three that we're trying to break our business down after undergoing strategic review with senior management here at S&W. We're going to sort of talk to you now this year and in the future about our four key centers of value. And on slide three in our presentation, again, if you go to the website and pull that down, you'll see that those centers of value are U.S. sorghum and sorghum technology and then forage products, international forage products in Australia and the Middle East. Our specialty crops, which I'm going to talk a little bit more about, which are stevia and a crop which I've mentioned before, I think, but not given much detail, which is camelina. And then I'm going to talk about for U.S. forage and alfalfa. So if you all stay with me on that presentation and I will reference the slides as we go along. So on slide four, you'll see that in focusing on these four major places of opportunity, businesses of opportunity, we also think that we're going to be able to Reduce our topics about $5 million. And you'll be hearing about more about that in terms of details in the future. As a lot of you have seen, we've announced a partnering of our wheat program, uh, with a couple other companies that have formed a JV called trigal S uh, genetics. And we're going to call that trigal, um, Australia. They are a worldwide wheat breeding company with operations in Europe and in South America. And they bring to the partnership also a gene for drought tolerance called CB4, excuse me, HB4. And that gene is included in our partnership and we will be developing that gene in Australia in wheat. We've also made a streamlining of our European sunflower operations. We've talked a little bit about that before. We're in the process of selling some of that germplasm in the form of germplasm licenses to various companies, but we have basically rationalized our Hungarian operations and saved about $700,000 a year in operating costs. And then, you know, because we are still losing a little bit of money, we've raised about $11.2 million through our ATM through the months of February and March. So a very busy time for S&W on lots of fronts. I'm going to give you a little bit of a description of each of those four growth areas. So on slide five, the first one is a little bit of discussion about the U.S. sorghum technology and our double team trait. You've heard me talk about this trait before. It's basically a trait that we have embedded in grain sorghum, which allows the farmer to spray over the top and kill grass weeds. And that's important because sorghum is itself a grass and you would kill the sorghum itself. and all the grass weeds without the protection of our genes. And so that has been a product that farmers have been really signing up to buy. We're basically sold out again in the 22 season as we were in the 21 season. And we're looking to the 23 season as our first really big year of sales. And that's because It takes just that long to grow the hybrids, the mom and dad seeds that you need to produce the hybrids that you're going to sell to a farmer. So on that slide five, you'll see some numbers. Our sorghum business, about 10 million in sales in 2020, moving to 11 where we had a little bit of double team sales. to $13 million this year, where we had a few million bucks of double team sales, to $22 million, where we're going to have a significant amount of double team sales. And obviously, in future earnings calls, we'll be talking about our progress there. So we also think that we have additional genes coming. We've talked about that also before. So it's a robust R&D platform. Basically, the second gene we've talked about is a durin-free gene. And the usefulness of that gene, why do farmers want to buy that? Durin-free is a precursor to hydrogen cyanide, obviously a compound that can either kill or make Cows and sheep very sick, and so our hybrids do not have any durin in them. They're durin-free, and so they don't make the cow sick because they don't have the precursors to hydrogen cyanide. So we're pretty excited about that crop and that crop continues to be in development. It's still probably three or four years out from the first sales, but we'd like to have additional genes coming. We were sort of birthed in the cradle of Monsanto where stack genes were really important. So we know the value of additional genes in each of our crops. Going on to slide six, just a little bit about our international forage business. So really that's our business that we have in Australia. A lot of these crops are fall planted crops, so they're planting in the southern hemisphere now as we plant in the spring crops in the northern hemisphere, and we're talking about and the clovers and vetch and forage cereals and grasses and other pasture species like that. As you guys know, who have followed the company, we're fairly dominant in that market in Australia. We have a relatively large business there with strong distribution. And then we also sell from Australia to 30 other countries. including the Middle East, mainly to the dairy industry. And it's mainly alfalfa varieties that are used in the dairy industry there. Moving on to slide seven, if you're following me in the deck, this is a little bit of a new description for everybody. So I've talked about these crops before, but now we're grouping them in a category that We're calling specialty crops. So Stevia is the first one on the left there of that slide, number seven. And it is, as you all know, a non-caloric sweetener. with a very fast growing market around the world. And we have an agreement with Ingredion to test our materials so that Ingredion can basically grow stevia leaf in the United States and then process that leaf and sell it to the U.S. stevia market, which is the largest market in the world. It doesn't take much imagination to look at the 200 ships outside of Shanghai Harbor and understand that making supply closer to the market, building supply closer to the market is something that everybody is trying to do right now. And we think producing your stevia in America for the US market is going to be the simplest, easiest and most profitable opportunity for stevia leaf in the next decade. But the crop that I really want to spend a little time talking about, which I've mentioned before, is camelina. So camelina is in the brassica seed family. It's an oil seed crop, so it is in the same family as canola seed and mustard seed. It has a very yellow flower-like mustard seed and canola. The crop itself is planted as a second crop. So Our parents always told us, you know, they weren't making any more acres of farmland. Well, so farmers around the world are going to take that same acre where they grow food as their major crop, and they're going to plant a second crop, a winter crop, on that same acre after corn or wheat or soybeans or sorghum. And they're going to plant something like camelina there. And camelina is a cover crop that people have been reading about, but it's a harvestable cover crop. It's a useful cover crop, right? It produces oil that you can harvest and send to a biodiesel facility and make into a low CI, a low carbon fuel like diesel facility. or you can frack it to jet fuel, but it's a huge opportunity to basically provide vegetable oils as the source of transportation fuels rather than suck petroleum out of the ground, which is going to release a carbon to the air and make the problem of global warming more difficult. So we basically use the sunlight to grow these oils in a second crop so we don't compete with the food industry for that acre. The farmer gets the benefit of planting a second crop, which he can sell and he can make additional revenue on. And that's going to be just a huge opportunity for the world and for U.S. farmers in particular. It's our calculations, actually, because the diesel market is so large in the u.s that if you planted camelina as a second crop on every acre so you still have all the food acres about 360 million acres of food acres in in the u.s but if you planted camelina on every acre of uh cropland that's farmed in America, you still could not produce enough oil to supply all of the diesel needs in a typical year of America. So it's just a huge opportunity and it's catching a lot of interest from lots of companies. So I'm going to go on to the next slide where I've just given you a couple of recent industry deals, activities. And these are all from the month of February of this year. So, you know, sort of 60-day-old kind of stuff. Chevron purchased a company, public company called Renewable Energy Group for about $3.1, $3.2 billion in February. BP signed a deal with New Seeds to produce these kind of renewable fuels and jet fuel from a company that is a cousin of Camelina called Coronada in Australia, where we also obviously have a big footprint on the farming industry and hope to move our biofuels business not just in America but to Australia eventually. And that deal was also done in February. And the third deal I've listed there is Exxon invested $125 million in Global Clean Energy, a company that they had an offtake agreement with previously, but that's to use Camelina to produce biodiesel in their Bakersfield, California plant. So lots of deals being done, lots of oil companies looking around for partners. There's probably fewer partners in the ag space than there are oil companies looking for partners. We've actually been talking to partners for about a year, but we haven't come to an agreement with anybody because we want to choose the right partner. So that will be news hopefully coming here reasonably soon about who that partner might be. Going on to slide nine, now I'm on the fourth of our four key businesses, growth areas, the U.S. forage and alfalfa business. This one is kind of got a mixed report card. We're trying to figure out what to sort of do there. Basically, the problem is that the dairy industry which used to be a Northern U S industry, sort of Michigan, Wisconsin, New York state. Think about those places. Uh, it's a dormant alfalfa market. That means that the alfalfa can survive the winter because it goes into dormancy. Uh, as you guys on the call might remember, I was in the dairy industry previously, um, milking about 10,000 cows down in Florida. I love the dairy industry, but the dairy industry has changed over the last few decades. And those cows, those dairies are moving south. And so the states of Colorado, New Mexico, Arizona, Texas have been the growth areas for the dairy industry. And those traditional states of Michigan, Wisconsin, and New York State have been losing dairy cow headcount. The problem for us is the dormant alfalfa people. When you go to those warm states, you don't need dormant alfalfa anymore. You need non-dormant alfalfa. We're trying to figure out and deal with that. I'll just give you a little bit of a feel based on my dairy experience. Those northern dairies, if you can get 60 to 75 pounds of milk per cow per day. That's the sort of metric for measurement of your efficiency of feed conversion. That's a pretty good yield on cows. But in the warmer states, because the cows like it, it's like going on vacation to Florida. The cows are happier. They yield 100 pounds of milk per cow per day instead of that 65 to 75, and that's why the industry has migrated so south because of the higher feed efficiencies and the higher milk yields per cow. So the dairy industry is more profitable in those warmer states than it is in the cooler states and the dairies are bigger. So that slide shows our sales being kind of flat around that $11 million revenue range. And we will be sort of trying to figure out what to do with those assets there. The assets include a big germplasm base that we purchased from Pioneer. So there's many, many decades of Pioneer plant breeding embedded in that germplasm base. And the germplasm has the reputation of being the most disease-resistant germplasm around in the country. So we're looking at options for that. And we also have a state of the, uh, uh, state of the art breeding station. That's two, three years old up in, uh, up in Napa, Idaho. And then we have a production plant that can be used to clean seed, uh, both alfalfa and then this camelina that I mentioned, uh, as the oil seed, uh, second crop, um, that we're looking for, uh, biofuels. Uh, so all those very exciting things. And, uh, I just like to summarize kind of where we are and just say that, you know, you're going to hear, be hearing more from us about these four areas, these four key centers of value. And that would be, again, the U.S. sorghum with genes business. The number two, the international forage business is basically our Australian business and Australian export business. These specialty, these two specialty crops that we're so excited about, stevia and camelina, and then the forage, U.S. forage alfalfa business that has seen cow migration and is challenging us to decide on what opportunity really we should make of that. And so we are realigning our cost structure to support these four businesses and to reflect what we think is the opportunity in each of those. And, you know, in the short run, as you saw from the double team slide, you know, we're expecting a big growth in double team sales. Next year will be our third year in the market. finally our seed production is catching up to the demand and we can supply more bags of hybrid seed to our customers. And we expect a significant amount of market share gain there. And if you go to slide five, you can sort of see our sales numbers there. So with that, I'm just going to end my part of the conversation here and turn the Whole presentation over to Betsy, who our CFO will go through the numbers and some details with you. Betsy, please.