S&W Seed Company

Hello and welcome to the SNW Seed Company fourth quarter and fiscal year 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 your telephone keypad. To withdraw from the question queue, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Robert Bloom with Lithum Partners. Please go ahead.

All right. Thank you. And thank you all for joining us today to discuss S&W Seed Company's fourth quarter and fiscal year 2023 financial results for the period ended June 30, 2023. With us on the call representing the company today are Mark Herman, company's chief executive officer, and Vanessa Bowman, the company's interim 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 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. 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, 2023, and other filings subsequently made by the company with the Security 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. These non-GAAP financial measures are not meant to be considered in isolation. or as a substitute for the comparable gap measure, and are not prepared under any comprehensive set of accounting rules or principles. A description of adjusted EBITDA and reconciliations of historical adjusted EBITDA to net loss are 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. 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 Herman, Chief Executive Officer for S&W Seed Company.

Mark? Hey, thank you, Robert, and good morning to all of you. As this is my first investor call as CEO, let me start by saying how excited I am to be leading this company. I believe S&W has a tremendous set of assets, in terms of both our people and our products that provide innovative solutions to the challenges farmers face. Our talented development team has led to the innovation of some of the industry's most impressive sorghum technologies. And we have a variety of advanced novel crops and cropping systems, which contribute to animal forage, renewable fuels, and cover crops, which also provide unique benefits to farmers. Our sales team has created strong customer connections with a desire to help farmers reduce their risk and increase productivity. In the short time I've been CEO, it has become highly evident to me that this team has demonstrated a commitment to be best-in-class seed company across all functions. I look forward to leveraging my 35-year career experience in the seed industry to help guide this focus of seed company best practices going forward. My experience has been centered around working closely with farmers to understand their unique production needs and positioning value, building strong seed and trait brands, and facing industry operational challenges and delivering efficiencies while achieving operational excellence. I have also led the licensing of germplasm and traits independent seed brands to enable farmers to purchase their seed from representatives and brands they have come to know and trust. Having an open technology platform inclusive of licensing for breakthrough traits and germplasm has proven to deliver the fastest penetration of valuable traits benefiting farmers and the industry. I see tremendous synergies between where S&W is heading and my broader experience and my passions. In terms of the agenda for today's call, we'll start with a quick look back at the accomplishments in fiscal 2023. I'll spend most of my time today discussing our strategies to drive growth and efficiencies in the company. Vanessa Bowman will then provide a detailed analysis of both our fiscal 2023 results and our go-forward outlook and expectations. You know, looking back to fiscal 2023, the company successfully executed a number of our strategic initiatives laid out at the beginning of last year to position S&W for success going forward. These included the commercial scale launch of our high-value double-team sorghum solutions, which saw sales increase to $6.5 million in fiscal 2023 compared to $2.4 million in fiscal 2022. This puts our first technology product on an estimated 6% of the total U.S. grain sorghum acres. The expansion of our gross margins through improvement of our obsolescence cost and increased sales of our high margin double-train products, overall gross margins went from 8.9% in fiscal 2022 to 19.8% in fiscal 2023. more than doubling our gross profit margin. We also saw a significant reduction in operating expenses as the company looked to better align its cost structure with our key areas of focus. Overall operating expenses decreased by nearly $7 million in fiscal 2023, or about a 17% improvement, even with the growth in our revenues. And finally, we executed a partnership with Shell to develop and produce sustainable biofuel feedstocks. This partnership strengthened our balance sheet through a $7 million upfront payment to SNW, an additional $6 million that is scheduled to be paid to us in February 2024, and the assumption of a $6.9 million in debt tied to one of the facilities for a combined $20 million. The resulting factor of all these accomplishments was a $14.3 million improvement in adjusted EBITDA, growth in revenue, and an approved balance sheet that should allow us to execute our strategic plans going forward. Further, there was the announcement in May of this year that we are evaluating potential avenues to unlock what we believe is unrecognized value in our international operations. which as a reminder are headquartered within our Australia subsidiary. I'll state upfront that we don't have any specific updates to share with you on this process. However, as managers, Vanessa and I are fully focused on operating that segment of our business to its fullest potential going forward. So that is a look back, good progress made, which I believe we can build upon significantly going forward. Since taking over as CEO about two and a half months ago, I have worked to define our business strategies with financial targets that will be delivered based on operational effectiveness and optimizing our two key areas of focus, our sorghum technology solutions in its pipeline and forage products. Let me start with sorghum. First off, I think it's critical for everyone to understand just how special and unique I believe the Double Team sorghum solution truly is. Launched on commercial scale in 2022, Double Team controls grassy weeds in sorghum that rob water, nutrients, and ultimately yield from the crop. Prior to 2022, due to the lack of effective weed control options in sorghum, farmers continue to bear higher risks for yield and crop loss due to weed pressure. Other crops offered options for weed control that ultimately led farmers to those crops, which in many cases are less suited for higher temperatures and more restricted water conditions that sorghum is uniquely adapted to. This has been a contributing factor to the historical declines in U.S. sorghum acres from around 10 million acres to around 6.5 million acres currently. In contrast, corn, soybean, and cotton growers have all benefited from research investments and advanced tools for weed control technologies. With its limited launch in 2021 and broader commercial launch in calendar year 2022, Double Team Grain Sorghum now accounts for what we estimate is approximately 6% of all grain sorghum acres in the U.S. We believe this will grow to more than 10% this next year. This is a tremendous achievement and highlights the value and demand for innovation in this critical crop. This increase in penetration and adoption of double team in sorghum is similar to historical penetration trends in technology launches of many of the large acre crops such as corn, soybeans, and cotton. Double team for grain sorghum is just the first leg of our planned sorghum technology portfolio stool for fiscal year 2024, as I'm happy to introduce two additional sorghum trade platforms from our R&D pipeline. First, we are introducing our double team forage sorghum solution in 2024. We expect that we will see the same rapid adoption for forage sorghum as we saw for grain sorghum. Early demand has been strong and we expect it to sell out in its introductory year. and continue on a penetration curve similar to what we have already seen with double-teamed grain sorghum. Secondly, we expect to commence a pilot launch of our presic acid-free trade for sorghum, what we previously called durian-free, with a few thousand acres being planted this year. As a background, durian is a precursor to presic acid, which is highly toxic to rumen animals that feed on fresh sorghum foliage. This, in essence, is what I would define as a quality trait that has great value for risk reduction, enabling safe livestock grazing of forage sorghum acres. With the pilot launch this upcoming year, we plan on commercially launching our Presic acid-free trait in 2025. It will be initially introduced as a solo trait and then shortly thereafter expected to be provided as a stack trait with double team. Let me pause there for a second. What do I mean by a stack trait and why is it important? As some of you may know, the biotech seed industry was built on developing new traits that address specific issues from weed control, pest control management above and below ground, quality, and others. The industry has addressed each of these specific issues by providing valuable seed options to farmers through stack trade offerings in a single seed. For farmers, there's an incremental value being created by each new trait that protects yield, decreases crop risk, increases crop quality and value, and saves time to ultimately improve acre productivity. As such, seed companies can deliver increased value to farmers versus forcing them to choose between valuable individual traits. Through the research investment and productivity, we can increase the value of the seed while production costs typically remain about the same. The result is a margin and profit improvement per bag of seed sold. That's why we believe trait-related R&D is so important, and the investments SNW has made over the years are beginning to pay off. On top of our double-team weed control system and now presic acid-free quality trait, we are also on plan to develop a second-generation post-grass herbicide trait which we plan to launch in 2025. Further, we are in discovery stage for an insect tolerant to resistant traits and broad spectrum herbicide trait as well. We are clearly becoming the key technology provider in this critical nutrient packed crop. As the fifth largest cereal crop globally, it can be used as a substitute for many grains on the market today. We are excited about sorghum because it is a crop that is uniquely equipped to handle higher temperatures and drier climates better than many other crops. But as I mentioned, it hasn't benefited from the historic research investments to successfully launch tools to support step change to improve the crop's productivity. As farmers increasingly recognize the risk reduction with new tools to control grasses and increase crop grazing safety technologies, I believe we will see continued share growth in the current sorghum acres as well as an increase in sorghum acres planted on dry land and limited water availability acres moving back to sorghum due to its improved adaptability to these conditions. From a sales and marketing perspective, we plan to continue to drive sales through our S&W-owned Sorghum Partners brand and align with independent seed companies with current market-leading brands in key grain and forage sorghum markets to maximize market penetration through licensing S&W germplasm and or traits. So even where S&W does not have market presence, we will be working with brands that have presence to deliver our technologies to their customers to optimize availability to farmers and adoption. This will not only be in the United States, but internationally as well. Today, there are approximately 8.7 million acres of sorghum being grown in four key countries where we have been developing relationships with seed companies with strong germplasm pools and established farmer relationships in Mexico, Argentina, Brazil, and Australia. Our strategy here will be to out-license our germplasm and or traits with well-established brands in each key sorghum market to reach the global sorghum market and accelerate adoption. Look for more on this to come. Operationally, we have developed an operational plan for this upcoming year that is intended to challenge all aspects of our organization to improve upon last year. Whether it be in production, sales, marketing, or fulfillment, to deliver on the promise that our sorghum technology portfolio provides to farmers. I believe we have worked through many of the bottlenecks that were presented to the company last year in achieving our original goals. As you likely saw in our press release, it is my expectation that revenue from Double Team Sorghum Solutions is expected to be $11.5 to $14 million in sales, representing an increase of 77% to 115% compared to fiscal 2023. With 70% less margins on double team, this is expected to be a big contributor to our bottom line improvement. When we break this all down, we see fiscal 2024 as being strong for our sorghum operations with the expectation for significant growth going forward. We are in a leadership position today with our trade portfolio And with the impressive pipeline I just touched on, we plan to maintain leadership of this important crop for many years to come. Transitioning, let me quickly touch on our international operations and our partnership with Shell before turning it over to Vanessa for a review of the financials. As I mentioned at the beginning, there are no updates I can share with you on the process we are going through to look to unlock value within our international operations. We will certainly provide an update if and when something may transpire. In the meantime, we are looking to implement many of the same strategies internationally as we are in the U.S. to drive growth and efficiencies in this segment. We are looking to optimize our production capabilities to drive down the cost of goods sold while developing a sales and marketing approach that highlights the benefit of our forward solutions around the world. While total results are expected to be slightly higher, we do look for growth in our alfalfa and forage legume business in the years to come. As had been the case in our international operations for a few years, there are various factors that are largely outside of our control, namely the geopolitical risks in certain jurisdictions we sell into. That said, we are looking to mitigate those risks, especially when we think about our guidance for the year. We are placing minimal dependence on the riskiest markets for us to achieve our stated guidance going forward. We certainly hope there to be an upside if certain markets materialize, but are providing what we believe to be a conservative view into this segment. As mentioned, Vanessa will touch on our guidance in detail momentarily. Vision Bioenergy Seeds Oil Seeds LLC is the partnership between S&W Seeds, and Shell for the purpose of developing novel plant genetics for oilseed cover crops as a feedstock for biofuels, green diesel, and SAF sustainable aviation fuel. VBO intends to develop Campbellina where oil and meal can be extracted for future processing biofuels, animal feed, and other bioproducts. On the biofuels front, there's not a lot that we can expand on here, except to say the partnership remains on track from what was communicated during the last conference call. The entity VBO is expected to carry out initial grain production later this calendar year on more than 7,000 acres of Campbellina planted. To this point, the partnership has met or exceeded all cropping acre thresholds originally laid out. As has been discussed in the past, shell is expected to buy all the grain that VBO produces through an offtake agreement that is in place. Vanessa will remind everyone of its impact to the income statement going forward, but I am certainly pleased with the progress being made and believe this represents a tremendous long-term opportunity for S&W and its shareholders. As I mentioned on the onset, we are striving to become a best-in-class seed company. Every organizational decision we make is expected to be data-driven to ensure it will have a positive impact on our customers and our shareholders going forward. We are instilling increased engagement with the finance team and financial analyses with all decisions that impact cost, margin, and cash management. As such, we have implemented a new series of operational initiatives to drive business towards customer satisfaction and profitability in the near term, including improved lifecycle management to reduce obsolescence costs and cash management. Rationalization of certain low margin product lines and effective seed treatment strategy. A seed manufacturing cost reduction plan through improved efficiencies that align with best in class standards. Cost controls in the seed industry are key and often the difference between being profitable and not. It is my goal to have best-in-class cost of goods and operating costs going forward. We also made the decision to suspend our continued investment in the Stevia germplasm development program. As we evaluate changes in the sweetener space, options between leaf or fermentation processes driven largely by costs. until we have a food or ingredient partner or commitment, or we can entertain a buyer option for our proprietary germplasm and program. As you will see from our guidance, we are guiding revenue for fiscal 2024 to be between 76 and 82 million, representing expected increase of 3 to 12% compared to fiscal 2023 revenue of 73.5 million. Again, we have tried to take a conservative view into our international operations and believe the pathway to achieving our stated objectives in the U.S. are achievable. Importantly, on gross margin front, based on the strategies we've discussed and expect to continue growth from our double team, we see consolidated gross margins moving from 20 percent in 2023 to between 24 and 26 percent in fiscal 2024. Further, we expect operating expenses to remain flat despite growth in revenues. The result is an approximate 2 to 5.5 million anticipated improvement in our adjusted EBITDA compared to fiscal 2023. We know there is still work to be done, but feel good about the strategies being implemented to drive continuous growth and improvement across the organization. Let me now turn it over to Vanessa to review the financials in detail. I will then provide a few final words, and then we can address your questions. Vanessa?