S&W Seed Company

Good day and welcome to the SNW Seed Company Reports Third Quarter Fiscal Year 2025 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 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 Lipum Partners. Please go ahead.

All right. Thank you all for joining us today to discuss S&W Seed Company's third quarter fiscal year 2025 financial results for the period ended March 31, 2025. With us on the call representing the company today is Mark Herman, Chief Executive Officer, and Vanessa Bowman, 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. If you dial into the call through the traditional teleconference line, as the operator indicated, please press star, then 1 to ask a question. If you are listening through the webcast portal and would like to ask a question, you can submit your question through the ask a question feature in the webcast player. Before we begin with our 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 Form Act of 1995. Forward-looking statements describe future expectations, plans, results, or strategies that 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 extra 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, 2024, and other filings subsequently made by the company with the Securities and Exchange Commission. To supplement S&W's financial results report in accordance with U.S. generally extended 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 for the comparable gap measure and are not prepared under any comprehensive set of accounting rules or principles. 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, please proceed.

Thank you, Robert, and good morning to all of you. I appreciate the opportunity to speak with you today. To set the agenda for the call this morning, Let me first remind everyone of the recent strategic actions taken by the company to reposition ourselves to exclusively focus on core Americas-based operations, led by our high-margin double-team Sorghum solutions. I'll touch on the current state of the Sorghum markets, which, as we see it, was really divided in some ways between pre- and post-tariff environments. From a pre-tariff perspective, we reported our first positive adjusted EBITDA quarter in many years. But as you saw from the press release, the post-tariff environment has impacted the U.S. sorghum market and caused us to revise our outlook for the fourth quarter and fiscal year. Despite these near-term disruptions, I will highlight some of the longer-term macro tailwinds that we believe are going to help drive sorghum growth in the future and how we are poised to be a leader in the marketplace. Vanessa will then provide detailed review of the financials, and we will then address any questions that you might have. We spent quite a bit of time discussing last quarter, but I believe it is important to remind everyone about three key activities we have taken over the past three to 12 months that we believe will ultimately unlock value for S&W and its shareholders. First, we successfully completed the VA process in Australia, which occurred in late November 2024. The agreement allowed for the release from the intercompany obligations owed to SNW Australia and agreement with the National Australia Bank that released SNW from the 15 million Australian guarantee. Ultimately, this process exclusively focused us on our America's market with a particular emphasis on our high margin double team trades. We followed up the completion of the VA process by entering into a new $25 million working capital facility, which included a letter of credit being provided by MFP, our largest shareholder, to be used as collateral. We also implemented a series of cost savings initiatives across the organization to align our cost structure of S&W while implementing best practices across the organization. Key outcomes have been improved that have improved gross margins, reduced operating expenses, and lowered working capital needs through the improved inventory management. This has been a quite heavy lift, and I commend the entire team at S&W for their efforts. With us being as well positioned as we have in many years, we were optimistic as we entered the calendar 2025 a year focused on driving in continued rapid adoption of our high margin, herbicide-tolerant, double-team solution, and simultaneously commercially launching our new prussic acid-free solution. As most of you are aware, the second half of our fiscal year, which runs January through June, is seasonally our largest and most important period of the year, where about 65% to 70% of our sales tend to occur. We started the third quarter strong with many of the initiatives we put in place playing out as we expected with revenue growth. Strong gross margin improvements, reduction in operating expenses, and positive adjusted EBITDA during the third quarter alone. These positive results were achieved despite a shift in the market that occurred about halfway through the quarter, starting with the announcement of potential tariffs against China in late January. and then the implementation of those tariffs in April. It really was a tale of two halves of the third quarter. As background, approximately 80% of the U.S. sorghum grain is exported, with China historically being the largest buyer in recent years. The data shows that U.S. sorghum exports to China dropped dramatically starting in January and February. In April, when China further imposed retaliatory tariffs on U.S. agricultural products, including sorghum, further declines occurred with minimal purchases being made in April. The reduced China demand has led to increases in U.S. sorghum inventories in the grain channels. driving them to sell sorghum domestically for ethanol production or cattle feed at lower prices. The oversupply has depressed farm gate prices, making sorghum less profitable compared to alternatives like corn, prompting some farmers to switch cropping plans. The bottom line has been a disruption to U.S. sorghum market in the near term. Clearly, this has not been an ideal situation as we enter our most important selling part of our fiscal year. That said, we believe two things will occur. One, we expect some type of resolution of the trade wars. We have seen this type of activity in the past and we eventually returned to some level of normalcy. Two, we believe this push towards healthier eating in the US will expand domestic demand for sorghum being used primarily as a crop to feed livestock to that of a superfood. If you have not had a chance, I'd encourage you to read a recent Wall Street Journal article discussing sorghum as the new it crop with its high protein, non-GMO, gluten-free characteristics. Beyond the positive characteristics of sorghum as a whole, our differentiated solutions of double-team and now prussic acid-free continue to garner strong customer response and are continuing to gain market share. Despite the macro pullback, we believe we will achieve our objectives for double team market share this year of approximately 10 to 12% market share of the U.S. grain sorghum acres. As the market normalized based on expected adoption rates, we believe double team sorghum can capture 25 to 30% of the U.S. sorghum market share. over the next eight years, which would generate about 70 to 78 million in traded sorghum sales. This translates into a CAGR in the mid to high teens. At this scale, we continue to estimate that we would generate gross margins in excess of 70% on traded products. With Double Team, we lead the way In this growth, we remain on track with our product development efforts with multiple new products set to be launched over the next five years. The commercial launch of our second generation double team or DT2 grain sorghum and prussic acid free and forage sorghum in fiscal 2025 and DT2 forage sorghum launch in fiscal 2027 in the U.S. The commercial launch of DT2 stacked with prussic acid-free grain sorghum in fiscal 2028 in the U.S., which will then be expanded to international markets in fiscal 29 and 30. The commercial launch of broad-spectrum herbicide sorghum in fiscal 2031 in the U.S., and the commercial launch of insect-tolerant sorghum in fiscal 2031 in the U.S., Coming back to prussic acid-free for just a moment, as a reminder, prussic acid-free eliminates the production of durin. It's a compound in sorghum plants that can break down into prussic acid. Prussic acid is toxic to livestock, causing cyanide poisoning that can lead to rapid death by interfering with oxygen transportation in the bloodstream. We did successfully launch the new trait on an introductory commercial basis during the first quarter. We have completely sold out of the launch supplies with customers excited about the capabilities of the new trade. One of the unique characteristics of Presque Acid Free is that it is used primarily for grazing cattle. We look forward to ramping seed production this summer and expanding sales as we look at next year. As you can hear, our long-term outlook for sorghum remains very optimistic. That said, due to the macro impacts from the tariffs, we are being forced to revise our expectations for the fiscal year ending June 30th. Our current expectation is for full year revenue of $29 to $31 million and adjusted EBITDA of negative $8.5 to a negative $7 million. The net effect is about a $5.5 to $7 million revenue impact and a $3.5 to $4 million adjusted EBITDA impact from our previous guidance. The vast majority of the impact is occurring on our expected sales of our high margin products, which carry 60% plus margins.