S&W Seed Company

Good day and welcome to the S&W Seed Company's second quarter 2023 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 a touch tone 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 from Lhythm Partners. Robert, please go ahead.

All right, thank you so much, and thank you all for joining us today to discuss S&W Seed Company's second quarter fiscal year 2023 financial results for the quarter ended December 31, 2022. With us on the call representing the company today are Mark Wong, President and 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 the 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 as 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 Our guidance on revenue and adjusted EBITDA for the fiscal year ending June 30th, 2023. The expected timing of initial grain production by the JV. The anticipated impact of the JV on our business and future prospects, including our positioning to be at the foremost of sustainable low-carbon energy solutions, as well as our financial outlook going forward. the ability of Shell's cash contributions to the JV to fund the JV's operations for a few years, our focus during the second half of fiscal 2023 on the JV and our four key centers of value, and our plans for the advancement of our business strategy. 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 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 ending 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 light 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 2023 will have a significant impact on net income or loss. Accordingly, a 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 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. This is really an exciting call for us on a number of topics. We continue to meet our 2023 goals on double team sales, margin improvement, and cost savings. We had another strong quarter of operational execution with growth in revenue and significant improvements in our gross profit margins, which were up 820 basis points. A $1.6 million decrease in our operating expenses, which all translated into a $1.9 million improvement in our adjusted EBITDA. Betsy, of course, will go through all of these numbers. One important item to remember is that Q2 is seasonally our lightest sales quarter of the year. But for this level of improvement on a low revenue quarter shows the leverage we are building through our operations. Research, production, and sales, and marketing are all hitting their targets this year. Now I would like to spend some time talking about the joint ventures we have closed this quarter. We finalized the joint venture with Trigold Genetics to develop and market high-performing wheat varieties for the Australian market, leveraging SNW's existing commercial breeding and footprint with Florimond de Prey's wheat germplasm base and BioSeries Crop Solutions HB4 gene for drought tolerance. This is an exciting opportunity for all parties, and we look forward to benefiting from the group's collective capabilities going forward. But the most exciting new partnership announced last week is our worldwide joint venture with Shell for the purpose of developing novel plant genetics, increasing oil seed cover crop acres, and managing the crushing of these new acres for biofuels, green diesel, and jet fuel production. Importantly, we are partnering with a world leader in shell that allows us to leverage our seed production, processing, and advanced genetics capabilities to be at the forefront of evolution taking place to produce sustainable low-carbon energy fuels from novel crop species like camelina. I have talked at a high level for more than a year now about the formation of a partnership with Big Oil, where S&W would be a significant player in this market. And last week's announcement certainly validates the value that S&W brings to the development of more environmentally friendly green transportation fuels. The name of the new venture is Vision Bioenergy Oilseeds LLC, or we call it for short VBO. So let's dive into this opportunity in a little bit more detail. As I said a moment ago, this is a worldwide joint venture focused on developing novel plant genetics, starting with camelina and moving to other oil seed cover crops in the future. SNW will contribute our expertise in seed genetics research, technology, production, and processing to VBO. Including our seed processing research facilities in Napa, Idaho, SNW will also contribute its camelina germplasm, and key personnel in research and production have agreed to move from S&W to VBO. Don Panter, EVP of S&W's Americas unit, will become the new CEO of Vision Bioenergy Oilseeds, LLC. With this joint venture, S&W received $13 million, $7 million up front, plus another $6 million on the one-year anniversary of the signing of this deal. And we'll have the remaining position of our mortgage on the Napa facility paid off amounting to approximately $7 million. Also together, altogether a $20 million payment. Now for those not familiar, Camelina is regarded as a scalable and commercially viable oilseed crop with the potential to be a sustainable feedstock source for the energy, transition to greener transportation fuels. Camelita is also recognized as a low greenhouse gas cover crop around the world. Cover crops are planted between the main crop growing seasons with the aim of not influencing the price or availability of crops grown for food and feed. Using effective controls and management, Camelina has the potential to provide sustainable feedstocks and create social and environmental co-benefits by diversifying farmers' income streams and reducing soil erosion. Biofuels such as those made from Camelina oil can be an effective way to help decarbonize customers in hard-to-abate sectors. where energy density in fuels is key, including the aviation, marine, and heavy-duty road transportation sectors. The basic model is as follows. VBO will use its plant breeding expertise and molecular biology to improve camelina seeds. VBO starts off by growing camelina seeds same as we do for our other seed crops, and cleaning it in the Napa plant. We are currently in the second crop year of VBO camelina seed production. The seed is sold to farmers who grow large acres of camelina grain. Next, VBO will buy every bushel of camelina grain from the farmers. The grain will then be collected in a central grain storage elevator and sent for crushing. VBO will contract with industry partners to crush the camelina grain and separate it into its oil and meal fractions. The oil will be transported and converted into biofuels by Shell North American facilities. The camelina meal byproducts will be sold for animal feed. In terms of VBO ownership, Shell will initially own 66% of the JV with S&W owning 34%. Upon the achievement of certain specific milestones, we are eligible to receive up to an additional 10% interest in the JV. In addition, S&W will have the option to purchase a 6% membership interest from Shell any time up to the fifth anniversary of the signing of this agreement. This could eventually put us at a 50-50 ownership percentage in VBO. Shell and SNW would be equal partners. In addition to the $13 million in cash payments that Shell is making to SNW, plus the $7 million payoff of the NAPA mortgage, Shell is also contributing an additional $25 million in funding to the operations of VBO. One additional point is important to make is that under a production agreement, VBO will continue to utilize the NAPA facilities to process our alfalfa seeds. In fact, we believe that the cost associated with processing our seeds will actually decrease Under this arrangement, since the facility has largely been underutilized and the overhead costs were creating a drag on our cost of goods in alfalfa. So the big question, of course, is what does this look like in the future? We expect VBO to carry out initial grain production in late calendar 2023, which is the middle of our fiscal year 2024. The numbers still will be nominal to start, but we are expecting a ramp up quickly. The expectations we have are that VBO will be cash flow positive after the first few years, and that shell funding of the $25 million to VBO will cover our expenses during that period. I, though, will not provide any ongoing guidance right now, but we'll be talking about that, the VBO future projections in the coming quarters and years. As we have talked about over the past year or so, we are all about creating centers of value. This announcement now creates a new high-value opportunity for S&W with an agreement that was a long time in coming. I just couldn't be more pleased to be working with the team at Shell on this exciting opportunity going forward. Now let me cover some of the other key centers of value. Double team, obviously in the short run, is a huge impact on our team's sorghum operations. As I have said before, we believe Double Team has the 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. During the quarter, we recognized revenue of $1 million on Double Team. Remember, the fulfillment season normally starts in about February. So for us to ship a million dollars in December, ending quarter really highlights the demand for the product and the fact that farmers want to get their hands on it early in order to confirm their supplies. As I have stated in the past, one of the big hindering factors we have is the availability of seed. This past season, we maximized our seed production to ensure we have adequate supply for the projected demand of double-team sorghum. Following a successful harvest of high-quality double-team seed, our finished seed supply is more than enough to hit our $12 million revenue target. These expected sales translate to over 750,000 acres of double-team to be planted by farmers in 2023. We talked about this some last quarter, but in addition to selling Double Team in the S&W Sorghum Partners brand, we currently have private label partners that are willing to sell Double Team also. At the moment, we have an agreement with seven different label partners. It is our expectation that nearly a third of the $12 million we expect to sell in fiscal 2023 will come from private label customers. The ability to leverage private label partners and utilize their expertise and distribution systems in other key geographies should be beneficial to us. We are also beginning to formulate our double team strategy for South Africa, excuse me, South America, Asia, and Africa. In addition, we are piloting double team sorghum, forage sorghum this spring similar to our Double Team grain sorghum pilot in 2021. We have the potential to sell about 1,000 acres of forage sorghum with Double Team this spring. To remind everyone, the reason we are so excited about Double Team is the significantly enhanced margin profile of the product. Based on our outlook for 2021, $12 million of double-team sales in fiscal 2023, we expect about 50% or $6 million to drop to the EBITDA line, the majority of which will occur in the second half of this year. Transitioning now to international and U.S. forage, as I mentioned at the beginning, this is seasonally our lightest quarter of the year. So while it is a bit hard to extrapolate certain data points to what the year might be, let me just make a couple of comments on the international and domestic forage operations that I think are relevant to how we see the back half of the year possibly shaping up. First, we are seeing an increase in demand in MENA and alfalfa, but also increasing pricing. This increase in alfalfa pricing, coupled with the tighter cost controls and inventory management we put in place, are resulting in a nice improvement in our margins. Additionally, the international shipping challenges we encountered as recently as a few months ago are starting to ease, which we hope will assist in our ability to quickly turn around seed crops and get them out to the door prior to the end of June. But there still may be risks in the supply chain, and we remain cautious here. I mentioned this last quarter, but it bears repeating. The devastating flooding across eastern Australia has severely impacted vast areas of cropping land and mixed farming enterprises. This has led to a slow start in our Australian domestic business. Also, once the water recedes, we believe there will be opportunities for sustainable remediation required, including replanting of crops and pastures. So on the heels of a very strong quarter, we feel the trends within our forage business remain good, both internationally and domestically. I'll let Betsy expand a bit more on the numbers. As we talked about during our year-end call in September and our Q1 call in November, for fiscal year 2023, we are focused on commercial execution as we begin to leverage all of 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 remain intensely focused on four key centers of value we have outlined previously, including our sorghum technology operations led by Double Team, a next-generation non-GMO herbicide-tolerant sorghum solution, Our international forage operations, which primarily operate out of Australia and provide products around the world. Our U.S. forage operations. And lastly, our specialty crops, which now include our JV with Shell for Camelina biofuel applications, as well as Stevia. We are reiterating our guidance for the year. As a reminder, on the high end of guidance, we are expecting $92 million in sales and a negative adjusted EBITDA of $2 million. On the low end, it is $80 million in sales and a negative $7 million in adjusted EBITDA. Betsy will once again expand on this momentarily and walk you through the bridges. With the progress made during the first half of the year, we see a path to achieving something closer to the high end of guidance, and with it, having a company that will soon be self-sustainable from a cash flow standpoint. Let me now turn it over to Betsy, who will walk you through the numbers in more detail, and we'd be happy to answer questions at the end of her presentation. Betsy, please.