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spk04: Good afternoon and welcome to the Farmers Edge live audio webcast for its second quarter 2023 financial results and business highlights. Please be advised that reproduction of this audio webcast in whole or in part is not permitted without written authorization from the company. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, simply press star and the number two. Individuals will be limited to two questions per person before being put back into the queue. At this time, I would like to turn the call over to Jay Jung, VP Finance of Farmer's Edge. Please go ahead, Mr. Jung.
spk01: Thank you, operator, and good afternoon, everyone. Before we start, I would like to remind you that all amounts disclosed on this call are denominated in Canadian dollars, unless otherwise indicated. Please note that the prepared remarks contain forward-looking information, and additional forward-looking statements may be made in response to your questions during the Q&A portion of the call. These statements reflect the company's current expectations regarding future events. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond the company's control or could cause actual results and events to differ materially from those that are disclosed in or implied by such forelooking information. Listeners are urged to consider the assumptions and risks and uncertainties associated with such forelooking information, including by referring to the assumptions, risks, and uncertainties discussed in farmer's edges filing with the Canadian security administrators. These statements do not guarantee future performance, and therefore, on-view reliance should not be applied upon them. The company does not undertake any obligation to update the forward-looking information provided during this audio call. Whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law. Finally, we would like to remind listeners that the company may refer to certain non-GAAP measures and key performance indicators, or KPIs, during the audio webcast. For further details on GAAP measures and KPIs, including relevant definitions and certain reconciliations, see Farmer's Edge filings with the Canadian Securities Administrators. We also posted on our website a short presentation that you may want to follow along with our remarks. Now, I turn the call over to our chairman, Bill McFarland, for opening remarks.
spk03: Good afternoon, and thanks for joining the call. Q2 was another busy quarter for management as the team made progress on redefining the business model for both the core digital agronomy platform and e-commerce business. and continues to reduce costs to reduce the cash burn rate, with costs now reduced over the past 18 months by about 50%. There still is lots of work to do to build a profitable and sustainable business, and growing revenue by adding high-value new acres and delivering on the value proposition to both growers and enterprise partners is the key priority for management in the back half of the year. Dibor, I'll pass the call over to you to provide your comments and expand on these topics.
spk00: Thank you, Bill. Good afternoon, everyone, and thank you for joining us for our Q2 2023 earnings call. I'm pleased to introduce Jae Jung, our newly appointed Vice President of Finance, who has joined our leadership team to drive our financial strategy forward and support our ongoing profitability and growth initiatives. Jay joined Farmers Edge in early 2023. Previously, Jay held senior leadership roles with Travel Manitoba, Shared Health Services and Canada Life. He brings a wealth of experience and expertise to our organization and has already started making positive contributions to the business. We are very excited to have him on board and we continue as we continue on this journey. Now let's dive into the updates on our key business areas. During our previous quarter's earnings call, we shared the improvements in our free cash flow by 28% and a reduction of 22% in our core expenses. I'm pleased to report that we are continuing the trend to make significant progress on our turnaround plan, which remains laser focused on profitability and free cash flow enhancements. Looking at the year-over-year progress in Q2, we witnessed a 26% improvement in our free cash flow, a 29% improvement in adjusted EBITDA, and an equally notable 29% reduction in our operating expenses. At the same time, we saw a 20% increase in our price per acre for Q2 on an year-on-year basis. Turning to our revenue and acreage performance, during our last call, I touched upon the key elements of our sales strategy, which are understanding customer needs, creating value, and conveying our value proposition, effective communication and feedback, and adaptability to changing market conditions. Our plan has not changed, and the key elements stay intact. We are not pleased with our slow new acre growth and are working hard to turn that around. We remain focused on driving top line growth by acquiring high value profitable acres. Adopting our people, process, and systems framework, we have taken the following actions in the last quarter. Number one, our new sales and business development team is now in place in North America and is going to market with a much more refined sales approach. A new VP sales joined the company in June and is responsible to lead the B2C sales in the US. Number two, market segmentation. We now have dedicated leads to drive the B2B partnerships and our ag retail discussions in North America. which is different from our previous approach. Our current revenue mix for digital is primarily B2C. We are putting equal effort to drive our direct B2C sales in the near term while actively working on B2B and ag retail partnerships for the long term. Our B2B and ag retail pipeline has ramped up and we continue to have progressive discussions with those partners in the US, Canada, and Brazil. As discussed in our earlier calls, the timing to close those deals can range from six to 12 to 18 months. Additionally, we are making an investment in the creation of a new function called revenue operations. This function will utilize a data-driven approach to drive intelligent insights to the sales organization allowing our sales team to spend more time focused on driving sales. With regards to acres, the decline in acres was primarily attributed to the removal of low value and discounted acres on our platform, with approximately 10% of low value acres still remaining on the platform. In spite of the drop in acres, we expect to keep our digital revenue flat year on year. Now moving on to cost, we've seen some significant traction on the cost side. In Q3 of 2022, we announced a cost reduction plan of 20 million. That plan has been fully implemented and those savings have been realized. To put things in perspective, at 2022 total costs were 102 million With the cost savings plan, our annual cost run rate this year is about 70 million. This quarter, we further refined our operating model in North America by consolidating our footprint and transitioning from an infield to a virtual service model in specific regions. We also closed our Australia operations as part of this strategy. This strategic move led to a 20% reduction in headcount and will lower our total costs by another 20 million. This recent optimization initiative will also lower our total expenses to approximately 50 million or less in 2024. So our total costs have been reduced by more than half compared to 2022, with a nominal impact on digital revenue. With these changes, we expect to have a free cash flow deficit significantly reduced at the end of 2024. And we expect to fill this hole through our revenue expansion initiatives, primarily with enterprise deals and other strategic partnerships. In summary, for us to break even, we need to essentially double our revenue and continue to take actions to optimize our business model. The other change we have made is in our e-commerce strategy. We made a pivotal transformation by transitioning to a non-asset based third party model. This strategic shift eliminates the need for physical inventory and associated costs. This direction aligns with our focus on providing technology solutions to the agriculture ecosystem. We are in discussions with some key ag retailers who have shown interest in utilizing our platform to drive their retail sales. I note that we have had a series of actions in flight and not all of them have yielded results yet. But we remain confident in our ability to execute our turnaround plan and achieve positive cash flow in the medium term. At a macro level, we still believe that our technology solutions, which, by the way, have been repeatedly validated by enterprise partners in our discussions, play a central role in solving the challenges around food security, land gap, and calorie shortfall. And we believe technology will play a much more important role than it has in the past within the agriculture ecosystem. We see that it is changing, and we are currently building capabilities to support that ecosystem. I'd like to thank our shareholders, employees, executive team, our growers, our retail and enterprise partners, our suppliers, and our board for their patience and their support during this journey. We look forward to continuing to update you on our progress in the coming quarters. I'll now hand it over to Jake to delve into the financial details.
spk01: Thank you, Vibhor. First of all, I'm very enthusiastic about becoming a member of the executive team and contributing to the implementation of the turnaround strategy. Since my integration into the team, a multitude of key initiatives have been started. The expediency with which these initiatives have been executed A couple with the rigor exhibited by the executive leadership has instilled in me the confidence that we are undertaking the correct measures to ensure the success of the turnaround plan and to improve financial sustainability. Now, in terms of the financial results, the continued improvement in cash flow and EBITDA and reduction in operating expenses in the second quarter of this year confirmed that the cost reduction initiatives are on the right track. As before noted in the second quarter, the adjusted EBITDA improved by $6.2 million, or 29%, and free cash flow efficiency improved by $5.5 million, or 26%, on a year-over-year basis. These results reflect our continuous efforts to improve our operational efficiency while maintaining quality services by taking concrete actions and executing sustainable cost reduction. The company's Q2 2023 operating expenses decreased by $7.9 million, or 29%, on a year-over-year basis, and further cost reduction was commenced in July of this year as part of a new business model strategy, which includes a 20% headcount reduction. Moving to the next slide, digital agronomy, fertility solution revenues. Q2 2023 were $1 million lower compared to the prior year due to discontinued digital agronomic acres, which are mostly low-value acres. The annual recurring revenues, ARR, was $23.5 million, a decline from the last quarter largely due to discontinued low-value acres and lack of market for agricultural carbon offsets, initially targeted for $3.7 million. However, The price per acre has improved by 20 percent on a year-over-year basis and 8 percent since quarter four of last year, which reflects efforts to improve acre profitability from the sales team. The restructure sales team, we expect to see growth in acre sales and higher acre retention in both B2B and B2C spaces, B2B spaces. This will in turn improve our ARR. With that, I will turn the call back to the operator for questions.
spk04: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Steve Hansen of Raymond James. Please go ahead.
spk02: Yeah, good afternoon, guys. Congrats on the cost savings initiatives. It sounds like those have gone to plan or even perhaps a bit better. I'm a bit curious about the shift in the model from the infield operation to more of a virtual footprint and what that means from the product offering or customer retention standpoint. Do you want to maybe just describe on what exactly the new virtual footprint allows customers or what the appeal is for new customers coming on board and how you expect to roll that out more broadly?
spk00: Yeah. Hey, Steve. Thank you for joining. I appreciate the question. Yeah, we really looked hard at our operational footprints and you know, we kind of did a level of segmentation keeping some of the key drivers in mind and primarily those drivers were, you know, we kept the net revenue and the free cash flow impact in those specific operational regions in mind along with the, you know, fertility adoption and then finally what the customer engagement on those, you know, in those regions were on the platform. And how we are planning to roll this out is although we are not going to offer in-field services within those segmented regions, we will still be able to deliver, you know, a much more consistent customer experience, you know, on a digital only model. And, you know, we've kind of taken steps internally to allow for the operating model to kind of, you know, give that consistent customer experience. And internally, we'll be able to measure our progress based on the kind of customer requests we are getting and how we need to continue to kind of improvise that model. So it was a combination of, you know, the net, you know, revenue in those regions along with, you know, how do we want to make the customer experience more consistent.
spk02: Okay, understood. And it sounds like you've had some success at adding incremental acres, albeit maybe not where you've targeted. But, you know, do you have an objective in mind in terms of, what kind of acreage growth you can get this year with the new model?
spk00: Yeah, so I think the first thing that I think we expect to happen with this digital model is that our customer acquisition costs and operational costs are going to be significantly lower. On the top line growth with regards to acres, we really want to be in the significantly high acre footprint Having said that, we've really strengthened the foundation of the sales team in the second quarter, and that's why I would say the second quarter is not a good reflection because we were changing the business model. We're also implementing changes with the leadership team. Like I mentioned, we've got a new VP sales in the U.S., and we've dedicated individual leaders for ag retail. So we expect this new model and the new structure to really culminate into positive results you know, next two quarters or so. So at a bare minimum, we want to be at least, you know, we want to exit the year flat on revenue year on year. And if we can get, and if we can drive a higher price per acre, then the number of, you know, acres will require to be flat on a revenue basis will be, you know, I would say relatively low. But we are taking, you know, actions internally, and we are trying to go hard at driving the new acre sales in Q3 and Q4.
spk02: That's helpful. Thanks. And then just one last follow-up is just, it sounds like ag retail is an important part of core digital strategy, but it also sounds like the e-commerce business is also shifting that way to some degree, or at least maybe a licensing model or something in towards that. Can you say describe the e-commerce transition and what that means or what you're trying to accomplish there from that, that ag retail standpoint, or I guess any partner standpoint, does that matter?
spk00: Yeah. So on the e-commerce, the shift is basically quite strategic in terms of we are not wanting to or we are not going to carry any physical inventory because then you run into these operational costs, fulfillment costs, storage costs, et cetera, and then it turns out to be not a healthy margin kind of business. But in the new third-party marketplace commission-only model, we are expecting to The play here is we're expecting to drive a significant amount of traffic by building that marketplace for the ag retailers so that they have an online platform with the technology strength that our company offers so that they don't first have to go and build it themselves, but they can leverage the technology, and we as technology experts can, you know, continue to improvise that model to eventually scale it up, you know, in the future. So in the near term, it's not going to be a significant change revenue generator, but we expect to drive some significant traffic and transactions through the platform, which will add stickiness and start spinning the flywheel faster, and then we acquire and build a customer base to whom we can actually sell our core farm command and digital services. So that's kind of the angle, and we are in discussions with some key ag retailers in the U.S. and in Canada and hope to see some traction fairly soon.
spk02: Okay, great. Very helpful. Thank you.
spk00: Thank you.
spk04: Once again, if you have a question, please press star then 1. Please press star then 1 now. As there are no more questions from the phones, this concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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