S&W Seed Company

Good day and welcome to the S&W Sheep Company reports first quarter fiscal year 2023 financial results. 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 telephone keypad. 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 Listen Partners. Please go ahead.

All right. Thank you very much, and thank you all for joining us today to discuss S&W Seed Company's first quarter fiscal year 2023 financial results for the quarter ended September 30th, 2022. With us on the call representing the company today are Mark Wong, President, Chief Executive Officer, and Betsy Horton, Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question and answer session. Before we begin with prepared remarks, please note that statements made by the management team of S&W Seed Company during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 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. Such forward-looking statements on this call include, but are not limited to, the advancement of S&W's business strategy, S&W's financial guidance for fiscal 2023, and S&W's expectations regarding its lender relationships and planned use of loan proceeds. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those 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, 2022, and other filings subsequently made by the company with the Securities and Exchange Commission. In addition, to supplement S&W's financial results reported in accordance with U.S. generally accepted accounting principles, or GAAP, S&W will be discussing adjusted EBITDA on this call. This non-GAAP financial measure is not meant to be considered in isolation or as a substitute for the comparable GAAP measure, should be read in conjunction with S&W's consolidated financial statements prepared in accordance with GAAP, has no standardized meaning prescribed by GAAP, and is not prepared under any comprehensive set of accounting rules or principles. A description of adjusted EBITDA and a reconciliation of historical adjusted EBITDA to net loss is included at the end of S&W's earnings release issued earlier today, which has been posted on the investor relations page of S&W's website. S&W has not reconciled its guidance for adjusted EBITDA for fiscal 2023 to net loss because the reconciling line items that impact net loss are uncertain or out of its control and cannot be reasonably predicted. The actual amount of these items during fiscal 23 will have a significant impact on net income or loss. Accordingly, reconciliation of this non-GAAP measure is not available without unreasonable efforts. An audio recording and webcast replay for today's conference call will also be made available online on the company's investor relations page. With that said, let me turn the call over to Mark Wong, Chief Executive Officer for S&W Seed Company. Mark, please proceed.

Thank you, Robert, and good morning to all of you on the call today. As we talked about during our year-end call in September, for fiscal year 2023, we're focused on commercial execution as we begin to leverage all the work that has been done over the past five years. Simply put, it's about driving towards and beyond profitability in the near term. We are doing this by being intensely focused on the four key centers of value we have outlined previously, including number one, our sorghum technology operations led by Double Team, a next generation non-GMO herbicide tolerant sorghum solution. Number two are international forage operations, which primarily operate out of Australia and provide products around the world. Number three are U.S. forage operations. And number four are specialty crops, which include camelina for biofuel applications and stevia. I'll review the progress of each of these areas during my presentation. Q1 of 2023, at a high level, I am extremely pleased. And we started the first quarter off on a very high note. Our first quarter revenue of 19.9 million was an increase of 28% compared to Q1 of a year ago. But as we discussed on our last call, fiscal 2023 is not simply about revenue growth, but our efforts to drive margin expansion and improvements in adjusted EBITDA. Compared to Q1 of fiscal 2022, we achieved a 260 basis point improvement in gross profit margins and a $2.4 million improvement in adjusted EBITDA up from negative 4.0 million to negative 1.6 million. Considering we had a 4.3 million increase in revenue, nearly 60% of our revenue growth dropped to the adjusted EBITDA line. One item I want everyone also to remember is that the first quarter is typically a heavy alfalfa quarter with very little of our high margin sorghum or double team sales occurring in this quarter. As we entered the back half of the year, we see potential for further significant gross margin and adjusted EBITDA improvements. Beyond sales execution and margin controls, we are executing on the cost control initiatives we discussed earlier this year. SG&A and R&D each dropped by $500,000 during the quarter or about a million dollars in total compared to Q1 fiscal 2022. Overall, we expect our OPEX spend to be much lower than last year. So operationally versus Q1 last year, 28% gross revenue growth, 260 basis point improvement in gross profits, $1 million decrease in operating expenses, and a $2.4 million improvement in adjusted EBITDA. Needless to say, we are very pleased with our progress in the first quarter. So let me talk a little bit about the four key centers of value again. The first being our U.S. sorghum technology double team business. First, let me discuss what I believe to be double team's potential potential. to revolutionize the sorghum market in the same way other weed control technologies have enhanced yields for crops such as corn, soybeans, and cotton. From a numbers standpoint, during the last year, we sold approximately $3 million of Doubleteen. But as we have stated, one of the biggest hindering factors we have is availability of seed. On that front, we have materialized our seed production and have taken steps we believe are appropriate to limit the risk, natural risk to farming that we can see such as freezes and excess heat. To date we have not seen quality concerns and our ongoing production harvest remains on track to support our 12 million revenue target from double team sales. These expected sales translate to about 500,000 acres of double team being grown by farmers in 2023. Operationally, the first half of our fiscal year is where we are booking pre-orders for the first quarter of the year. Initial indications are very positive and with a third of our expected crop already pre-ordered, the positive experience and word of mouth across the industry is truly benefiting us this year. We talked about this same last quarter, but additionally, selling Double Team in a S&W Sorghum Partners brand. We are also looking at a number of private label opportunities, which we believe can expand distribution. We currently have many more private label partners looking at packaging and selling Double Team. We... Expect that about a third of the 12 million of expected sales for 2023 will be to these private label customers. The ability to leverage key private label partners and utilize their expertise in distribution systems and other key geographies should be of huge benefit to us. Our private label partners will be important next year when we again expect double team sales to grow significantly in the American market. And we are also beginning to formulate our double team strategy for South America, Asia, and Africa. We remind everyone the season we are so excited about double team is significantly, excuse me, the reason we are excited about double team is the significantly enhanced margins for the product. Based on our outlook of $12 million of double team sales in fiscal 2023, we expect about a 50% or 6 million to drop to the EBITDA line. In summary, at the moment, we feel we are well positioned to hit our outlook for sorghum this year. I want to give an update on a sorghum product technology we've discussed previously that plays In the forage space, the technology is what we have previously called durian-free, and we continue to believe that it is some real potential in the global forage markets. We are renaming it prussic-free to reflect the fact that the trait eliminates prussic acid in sorghum. Farmers are more familiar with prussic acid terminology and with the fact that this naturally occurring compound can be under certain conditions occur in conventional sorghum, endangering grazing livestock. Crescent-free trait will eliminate this risk and allow worry-free use of sorghum, forage sorghum, regardless of growing conditions. We have introductory amounts of seed that we're growing this year, and we will have enough parent seed to produce a lot more seed for next year's crop year and expect to roll out in the U.S. to solid demand. Our second center of value, international forage, is also on a very positive upswing. The key drivers for improvement during the first quarter was alfalfa, particularly from our international forage operations. not from sales in Australia. Remember, this is traditionally a quarter where about 75% of our sales are alfalfa. As I mentioned a moment ago, this isn't just about sales, but gross margins as well. Our alfalfa business has margins in excess of 22% for the quarter, the highest quarterly margin for alfalfa that we have achieved in several years. We believe that the strong Commodity prices globally are underpinning continued strong growth in all agricultural inputs, and that the alfalfa market is no exception. Alfalfa pricing is up 22% compared to a year ago in the same period. On the flip side, our tighter cost controls and inventory management that we have put in place, we are achieving the forecasted savings outlined earlier in the year, leading to the improvement in margin. Further, the international shipping challenges we encountered as recently as a few months ago are starting to ease. Looking ahead, devastating floods, though, in eastern Australia has severely impacted vast swath of cropping land and expect mixed farming enterprises Once the water recedes, we believe there will be substantial remediation required, including replanting of crops and pastures. This has led, though, to a slow start for our Australian domestic business, but we expect it should benefit from international forage operations later in the year. While one quarter does not make a year, recall that the high end of our original guidance called for approximately 9 million in growth from international forage operations, while the low end had an assumption of flat revenues. While we believe our shipping issues have somewhat eased, we still face risks of delay on future shipments in future quarters. However, with a 3.5 million first quarter increase in international forage sales, we believe we are starting the year off on the right foot. Commenting now on our third center of value, our U.S. forage business. It's pretty much steady state as it goes. We continue to encounter headwinds that have, we have discussed in the past based on decreasing U.S. alfalfa acres. We have a nice base of business within this segment though. And as our customers desire our germplasm base with an emphasis on high yield and forage quality, with resistance to diseases and stress. Operationally about 10 to 12, 11 million or so of annual revenue is what we continue to expect from this sector. However, beyond the germplasm base, the real assets here remain our breeding station and processing facilities in Napa, Idaho, which we believe can be utilized for biofuel species such as camelina. And then onto our last, center of value which is the specialty crops and again the topic of biofuels i haven't i don't have any real update since our last report but let me remind you of what we have discussed last quarter it is our intent to partner with a large with large energy companies for biofuel production leveraging our capabilities in production, processing, packaging of camelina. Due to our unique position as an integrated global seed company with specific expertise in breeding production sales and distribution of small seeded specialty crops, including camelina, which are highly desirable for biofield production, we believe will be an ideal partner. As I mentioned last quarter, we're planning about 300 acres of camelina this fall, for seed harvest next year. And it remains our goal to enter the camelina market as a seed and technology provider with multiple industry transactions and to provide a potential roadmap. We are optimistic that there is a mutual beneficial agreement to be had in the future. I look forward to hopefully being able to provide further updates on this in the next couple of quarters. Just an update on our wheat JV. We're targeting to finalize the deal in the second quarter of this fiscal year, so the next couple of months, which would combine our wheat efforts in Australia with Trigal Genetics. As we've mentioned previously, it's a JV between BioSeries Crop Solutions and Flora Monde de Prey, a European wheat breeding company. We believe that the joint venture could significantly strengthen S&W's position in wheat, enabling us to benefit from the worldwide exposure the combined entity would provide. And further, we would all allow us to focus in our efforts internally on our key centers of value. A banking update for me, usually Betsy normally would hit most of the banking updates, but I, I just wanted to point out a few high points since we've made a lot of progress in this area. I just wanted to highlight how pleased I am to have entered into a new increase in extended credit facility with National Australian Bank for up to $48 million Australian, which is an increase of $9 million Australian from our current facility. Further, at the end of October, our largest shareholder, MFP partners increased their letter of credit from $9 million to $12 million, allowing us to increase our CIBC loan from $18 million to $21 million U.S. We believe these increased credit facilities reflect the support these groups have in our strategic plan going forward as we grow revenues and drive towards profitability. Before I turn it over to Betsy, just let me remind everyone of our outlook for fiscal 2023. On the high end of guidance, we're expecting 92 million in sales and a negative adjusted EBITDA of about $2 million. On the low end, it's 80 million in sales and a negative 7 million in adjusted EBITDA. The low end of the guidance assumes only growth from double team and flat revenue through the rest of our operations. Among other things, the higher end assumes 3 million in growth from traditional sorghums, and 9 million in growth from our international forage operations. Betsy will give you more detail and expand on this in her presentation. With the progress made during the first quarter where international forage is up 3.5 million, we see a path to achieve, we believe, something closer to the high end of the guidance. But as I said earlier, our quarter does not make a year. then we still have a lot of work ahead of us to achieve these results in the current fiscal year. And one additional item I'll point out is that we have made zero assumptions for any biofuel or stevia-related agreements for fiscal year 2023, guidance which may prove to offer upside opportunity for the company. So it's a great opportunity. start in the year on all fronts. And let me now turn it over to Betsy to walk through the numbers in more detail. And then we will be back and happy to answer any questions. Betsy, I'll turn it over to you, please.