S&W Seed Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 27, 2023

There are 6 speakers on the call.

Operator

Hello, and welcome to the S&W Seed Company 4th Quarter and Fiscal Year 2023 Financial Results Conference Call.

Speaker 1

All participants will

Operator

be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

Speaker 2

All right. Thank you. And thank you all for joining us today to discuss S&W Seed Company's 4th 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 will open the call for a question and answer session.

Speaker 2

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 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, 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 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 ks for the fiscal year ended June 30, 2023, and other filings subsequently made by the company with the Securities and Exchange Commission. In addition, to supplement S and W's financial results reported in accordance with U. S. Generally Accepted Accounting Principles or GAAP, S and W will be discussing adjusted EBITDA on this call.

Speaker 2

These non GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP 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 The net loss are included at the end of S and W's earnings release issued earlier today, which has been posted on the Investor Relations page of S and 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?

Speaker 3

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 and W has a tremendous set of assets in terms of both our people and our products that provide innovative solutions to the challenges 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, in cover crops, which also provide unique benefits to farmers. Our sales team has created strong customer connections with a desire to help farmers In the short time I've been CEO, I have become highly it has become highly evident to me That this team has demonstrated a commitment to be best in class C 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.

Speaker 3

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 inclusive of licensing for breakthrough traits in germplasm has proven to deliver the fastest penetration of valuable traits benefiting farmers I see tremendous synergies between where S and 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.

Speaker 3

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 and W for success going forward. These included the commercial scale launch of our high value double teamed sorghum solutions, which saw sales increase to 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.

Speaker 3

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 $7,000,000 In fiscal 2023, we're 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 $7,000,000 upfront payment to S and W, An additional $6,000,000 that is scheduled to be paid to us in February 2024 and the assumption of a $6,900,000 in debt tied to one of the For a combined $20,000,000 The resulting factor of all these accomplishments was a $14,300,000 improvement In adjusted EBITDA, growth in revenue and an improved 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.

Speaker 3

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 2.5 months ago, I have worked to define our business strategies with financial targets that will deliver be delivered based on operational effectiveness and optimizing our 2 key areas of focus, Our Sorghum Technology Solutions and its pipeline in 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 Pea Sorghum solution truly is.

Speaker 3

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 continued to bear higher risk 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 10,000,000 acres to around 6,500,000 acres currently.

Speaker 3

In contrast, corn, soybean and cotton growers have all benefited from research investments in advanced tools for Weed Control Technologies. With its limited launch in 2021 and broader commercial launch in calendar year 2022, DoubleTeam grain sorghum now accounts for what we estimate is approximately 6% of all grain sorghum makers 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.

Speaker 3

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 2020 4, as I'm happy to introduce 2 additional sorghum trait platforms from our R and 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 team grain sorghum.

Speaker 3

Secondly, we expect to commence A pilot launch of our prusik acid free trade for sorghum, what we previously called durant free, with a few 1,000 acres being planted this year. As a background, durin is a precursor to prussic acid, which is highly toxic to ruminant 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 Prasik acid free trait in 2025. It will be initially introduced as a solo trait and then shortly thereafter Expected to be provided as a stacked trait with Double Team.

Speaker 3

Let me pause there for a second. What do I mean by a stacked trait and why is it 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 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.

Speaker 3

The result is a margin and profit improvement per bag of seeds sold. That's why we believe trait related R and D is so important And now presic acid free quality trait, we are also on plan to develop a 2nd 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 pack crop, as the 5th largest cereal crop globally, it can be used as a 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 We successfully launched tools to support step change to improve the crops 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 sorghumakers 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.

Speaker 3

From a sales and marketing perspective, we plan to continue to drive sales through our So even where S and 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 adoptions. This will not only be in the United States, but internationally as well. Today, there are approximately 8,700,000 acres of sorghum being grown in 4 key countries where we have been developing relationships with companies with strong germplasm pools and established farmer relationships in Mexico, Argentina, Brazil And Australia, our strategy here will be to outlicense our germplasm and or traits with well established brands in each key sorghum market And operational plan for this upcoming year that is intended to challenge all aspects of our organization to improve upon last year, 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 The $14,000,000 in sales, representing an increase of 77% to 115% Compared to fiscal 2023.

Speaker 3

With 70% gross margins on Double Team, this is expected to be a big contributor to 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 Many of the same strategies internationally as we are in the U.

Speaker 3

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 forged solutions around the world. While total results are expected to be slightly higher, we do look for growth in our Ocampa and Ford's Lagoon 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.

Speaker 3

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 Seed Oilseeds LLC Is the partnership between S&W Seeds and Shell for the purpose of developing novel plant genetics for oilseed cover crops Sustainable Aviation Fuel.

Speaker 3

BBO intends to develop Camelina, where oil and meal can be 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 VVO is expected to carry out initial grain production later this calendar year and more than 7,000 acres of Camelina planted. At 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 BBO 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 and W and its shareholders.

Speaker 3

As I mentioned on the onset, we are striving to become a Best in class C 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 life cycle management to reduce obsolescence costs and cash management, rationalization of certain low margin product lines An 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.

Speaker 3

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 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 $76,000,000 $82,000,000 representing expected increase of 3% to 12% compared to fiscal 2023 revenue of 73,500,000 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.

Speaker 3

Importantly, on gross margin front, based on the strategies we've discussed and expect to continued growth From our double team, we see consolidated gross margins moving from 20% in 2023 to between 24% 26% in fiscal 2024. Further, we expect operating expenses to remain flat despite growth in revenues. The result is an approximate $2,000,000 to $5,500,000 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.

Speaker 3

I will then provide a few final words and then we can address your questions. Vanessa?

Speaker 1

Thank you, Mark. Good morning to everyone on the call today. As this is a year end conference call, I'm going to focus most of my comments on the results for the fiscal year. A breakout of 4th quarter results is included in the press release, and I would be happy to answer specific questions on the 4th quarter numbers where need be. Starting with revenue.

Speaker 1

Total revenue for fiscal 2023 was $73,500,000 compared to total revenue for fiscal 2022 of $71,400,000 The $2,100,000 increase in revenue was primarily due to the $4,000,000 increase in double team sorghum sales in the U. S. Domestic market, a $4,000,000 increase in non dormant alfalfa sales in the Middle East and North Africa and a 3,800,000 increase in non dormant alfalfa and grain sorghum sales in Latin America. This was then offset by a $4,300,000 decrease in the Australian domestic pasture sale due to flooding in key planting regions that lowered sales expectations in the first half of fiscal twenty twenty three, A $3,000,000 decrease in revenue in the Asia region due to logistical delays in international shipping and COVID related impacts in China during the prior year that affected distributor demand, A $1,700,000 decrease in U. S.

Speaker 1

Domestic alfalfa revenue due to a decline in demand and finally, a $1,000,000 decrease in non double teen sorghum revenue. As Mark mentioned, as we look to fiscal 2024, we are expecting revenue of $76,000,000 to 82,000,000 representing an expected increase of $2,500,000 to $8,500,000 compared to fiscal 2023 revenue of $73,500,000 Breaking this down further, we are anticipating Double Team to be between $11,500,000 to $14,000,000 an increase of 77% to 115% compared to fiscal 2023. There will be some offset to non double team related sorghum sales as we transition customers to our higher valued products. As such, overall sorghum related revenue is expected to be between $22,000,000 $23,000,000 in total compared to $18,500,000 in fiscal 2023. On the international side, we are expecting revenue to be between $45,000,000 to $50,000,000 compared to $43,600,000 in fiscal 2023.

Speaker 1

And finally, on the U. S. Forge operation, we see revenue of about $9,000,000 compared to $10,800,000 last year. Now turning to margins. GAAP gross margins for fiscal 2023 were 19.8%, compared to GAAP gross margins of 8.9% in fiscal 2022.

Speaker 1

The strong improvement of GAAP gross margin was primarily driven by the increased sales of a higher margin double team sorghum solution in North America, in addition to the favorability of non cash inventory write downs due to improved inventory lifecycle management. Inventory write downs or what we refer to as LCM expenses during 2023 were $2,800,000 compared to $6,400,000 in fiscal 2022, where we experienced a higher level of certain lots that had deteriorated in quality and germination rates. As Mark mentioned, feed lifecycle management will continue to be a focus area for us as we have reduced our product offerings going into 2024 to customers through seed treatment rationalization. Looking to fiscal 2024, we see continued improvement with gross margin. Inclusive of any LCM charges, margins are expected to be between 24% 26% compared to the 19.8% we saw in fiscal 2023.

Speaker 1

Again, The biggest driver here is expected to be the growth in our high margin double team products. Now we will transition to operating expenses. GAAP operating expenses for fiscal 2023 were $32,500,000 compared to $39,200,000 in fiscal 2022. The decrease is a result of the company's focus on aligning its cost structure to support its key centers of value as Mark mentioned at beyond set. Breaking it down further, there was a $2,500,000 decrease in research and development expenses, a $2,000,000 decrease in selling, general and administrative expenses and a $1,500,000 decrease from a goodwill impairment charge recognized in fiscal 2022 and a $700,000 decrease in depreciation and amortization.

Speaker 1

This level of $32,500,000 which is inclusive of depreciation and amortization is a level we feel we can maintain in fiscal 2024, even though we see revenue growing. We are intent on driving efficiencies across the entire enterprise. Betsy Horton mentioned this in the past, But I think it bears reminding that with the creation of the Tribal and VVO partnership, we would be playing an administrative role for both new ventures handling things such as finance accounting, HR and IT under a service level agreement established this year. In our financial statements, these items are presented as services revenue and an offsetting cost in SG and A, which we believe enhances the visibility into our operating expense reduction initiative. During fiscal 2023, we had approximately $800,000 of service revenue pertaining to our partnership and an offsetting cost of SG and A of the same 800,000 As we look to fiscal 2024, we expect about $600,000 in revenue to come from the partnership, which was a similar offset to the cost of SG and A.

Speaker 1

Now to EBITDA. Adjusted EBITDA for fiscal 2023 was a negative $9,300,000 compared to adjusted EBITDA of negative $23,600,000 for fiscal 2022, an improvement of $14,300,000 A full reconciliation is available in the press release. As we look to fiscal 2024, our guidance is a negative adjusted EBITDA of 7,500,000 to negative $4,000,000 This would represent an improvement of approximately 2 to $5,500,000 compared to fiscal 2023. The biggest anticipated driver here would be the gross profit leverage from Double Team Grain and Forage Sorghum sales. Finally, on the net income line.

Speaker 1

GAAP net income for fiscal 2023 was $14,400,000 or $0.34 per basic and diluted share, compared to GAAP net loss of $36,400,000 or a negative $0.93 per basic and diluted share for fiscal 2022. We experienced the gain on the sale of the business interest of $38,200,000 related to the establishment of a partnership with with Shell and BBL. One final note, as Mark mentioned earlier, we are scheduled to receive a $6,000,000 payment from Shell in February of 2024. Despite our negative adjusted EBITDA expectation, which translates rather closely to our cash utilization, the payment from Shell is expected to cover any operating cash needs this year. Beyond fiscal 2024, if we're able to continue the growth in our sorghum technology portfolio and achieve the benefits of the stability and cost containment initiatives across the remaining parts of the organization, it is our thought that we will be in a positive cash flow position in the near future.

Speaker 1

Again, I am happy to follow-up with any of the details we went through if you should have additional questions. With that, Let me turn it back over to Mark.

Speaker 3

Thank you, Vanessa. In summary, I hope you take away from this call that we are laser focused on operating this business With best in class practices from top to bottom, we have a significant growth opportunity ahead of us, To be the sole technology leader in a crop doesn't come along very often, but when they do, they tend to see rapid adoption and value creation I simply couldn't be more enthusiastic to be leading this company at this exciting time. I thank you for your continued support of S and W Seeds, and I look forward to taking your questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Ben Klieve with Lake Street Capital Markets. Please go ahead.

Speaker 3

All right.

Speaker 4

Thanks for taking my questions. A few from me this morning. First of all, on Double Team, I'm wondering if you can talk about kind of expectations versus reality in 2023 from this product, dollars 6,500,000 Great year over year, Cliff. But relative to the kind of $12,000,000 target that was laid out a few quarters ago, Certainly fell short. So I'm wondering if you could talk about what went right, what went poorly with Double Team this year, And then kind of how the realities of 2023 give you confidence in your

Speaker 3

Hey, Ben. Thank you very much for joining this morning, but also for the question. I think it's an excellent place to discuss because I don't see it at all as a step back or a concern around Double Team itself. As we look at the launch of Double Team in 2021, it was on very small volumes with I believe 23 different distribution points and or customers. And as we looked at the growth going from 2021 to 22, it grew to $2,400,000 And then this last year, to your point, Double Team grew from $2,400,000 to $6,500,000 I mean, it's a tremendous growth curve as far as demand.

Speaker 3

And what we've seen from the 23 distribution points that trialed and sold a very Small amount in 2021 is their success rate and positive experience, right? With a solid growth curve from every one of those 23 distribution points, except for one That actually changed their distribution makeup, which was no longer part of S and W under the same name. So as far as growers Utilizing and trialing it and then expanding their use, I mean, it was just a tremendous success. I do believe, potentially there was a little bit of Over exuberance, looking for farmers to make a significant growth or significant Introductory experience without that opportunity to do a trial, experience it on their farm And then grow from there. But as I look at other traits that I've been involved with in the launches, if I look at Double Team and the growth curve that it's Had some introduction to what we're expecting this coming year of Double Team being on more than 10% of The U.

Speaker 3

S. Sorghum acres, it's definitely demonstrating a positive impact in the market. And I really have very little to no concern about the performance of the product itself being on 6% of the U. S. Acres this year and we're pretty well through The application of First Stack over those acres for grass control And the number of service calls that we've received, I'd say are very limited versus what I would have expected for a new Technology in the market, but feedback from the field and others has been very, very positive on performance.

Speaker 4

Great. That's helpful color. Thanks, Mark. And in your prepared comments, Matthew touched on the kind of movement of legacy non double team sorghum Farmers to Double Team variety, can you guys talk about from a high level what your expectation is for For them that does not have either Double Team or the profit free trade introduced over the next few years, is that a business that you just think is going to just Naturally go away or do you think there's going to be some material level of revenue from non technology sword on For the foreseeable future.

Speaker 3

Yes, that's a great question, Ben. And I do think it's part of the lifecycle management That both Vanessa and I talked to as well, because I do believe as we look at Double Team and its continued growth on overall sorghum acres, I do believe it'll obviously be replacing, one of its growth factors are replacing Current sorghum acres that really have a traditional germplasm in place, right, which we also have our entire sorghum business started out as that At a 2021 introduction. Now that product or product line is much lower margin, but I do I believe our share within those non Double Team Acres Will and should remain the same, if not increasing our share amongst those acres because of a stronger brand Position and distribution with farmers due to the double team trade, but I do anticipate non double team acres in to be a smaller portion of the sorghum market. And I believe as Vanessa went through our guidance going forward, She did touch on we do expect a small decrease in non double team, non prussic acid grain and forage As these products show superior performance going forward, the positive to us is on the DT Sorghum position, it puts the product margin in the above 60% to 70 Percent margin in the conventional sorghum market, we're looking at margins closer to that 20% to 25%, right?

Speaker 3

So it's a great impact for us as it's Moving the product line up to higher value, but we need to be very smart about how we manage the non double team market to Sure, we don't build supplies based on historical experiences in a market that is likely to be a decreasing size market, right. So I think the key thing you call out there is we need to maintain our margin on that non DT market in our presence, but recognize it needs to be with Tighter excess inventories planning on a shrinking market.

Speaker 4

Got it. Got it. Very helpful. Last one for me and then I'll get back in queue. You talked about exiting some kind of lower margin Forage crops and seed treatment applications, I'm wondering if you can talk about the Level of revenue contribution from these exited businesses in 2023 And what if any revenue contributions from these businesses that you're leaving is included in your 2024 guidance?

Speaker 3

Yes, that's a great question as well. And I would say as general practice, a healthy company will look at everything that's Lower than our overall average margin and really question, look, are there things that either one we can address within our own System that's driving costs that can improve its margin position or 2, is it diluting the overall And diluting focus to product lines that maybe resources could be moved from those applied to Other areas where clearly the growth in the product line would deliver more results to the company and the shareholders, right. So, I would say this is a standard practice that I've really been involved with most of my career. So I don't think The focus itself is highly unusual, but we will be evaluating all these product lines. And you're asking the right question, which I don't have direct answers for you as we evaluate these and we're fairly early in stage with really drilling down on some and asking the questions, Do we change our focus and redirect resources, but it is a process we're going to go heavily through as we move

Speaker 4

Okay, very good. Directionally, very helpful. Very good. Well, best of luck with all these

Operator

The next question comes from Nelson Obis with Wynnefield Capital. Please go ahead.

Speaker 5

Yes. Hi there. General comment, this call has More informative and granular than past calls. So I find that very helpful. Just a quick question about R and D for fiscal 2024.

Speaker 5

Do you expect it to hold even to where it was in fiscal 2023?

Speaker 3

Thanks, Nelson. We are looking at relatively flat spending in research. Now some of what we talked about in the call is the exiting of some of either the product line or focus areas that we don't see A clear future of driving revenues and margins, we're exiting and I'll use the example of Stevia, right. So We've halted research activities with that product and that's enabled moving those to our sorghum pipeline where with our sorghum pipeline, we've got much more demands as far as the amount of testing requirements due to the depth of the product line as well as efforts with germplasm transformation processes to introgress traits. So there's been a Reduction in some areas, Nelson, and then moving those to what we see as really our high margin drivers, both for the short and for the long But for this year, our discussion is to keep spend very tight, be highly efficient.

Speaker 3

And as we're generating cash to Vanessa's point, we'll keep reevaluating those on how we invest resources going forward.

Speaker 5

So when you look at the EBITDA projections you've given us, does that imply discontinued operation in Sevia or those are or there might be some write downs that in other words, getting out of categories, which could Trigger a write down. Is that anticipated in the EBITDA projections? Or is that a separate issue to be dealt with when they come up?

Speaker 3

Yes. I'll let Vanessa refer to it.

Speaker 1

Yes. There are no anticipated write downs, Nelson, from any of the product lines that we're pausing at the moment. The bearing on the income statement is pretty much all driven in OpEx, right? And so as Mark mentioned, just to put some dollars around it, pausing the stevia R and D program is about 300,000 dollars per fiscal year that we're refocusing our efforts in that R and D space again towards our high valued Options for farmers going into the near future and longer term. So that's about $300,000 But in our OpEx projections.

Speaker 1

There are no known write downs of any of the product lines that we're pausing at this moment.

Speaker 5

Okay, got it.

Speaker 3

And with that Nelson, we're also moving the material itself, right, because we do have a platform of germplasm that has been developed. We're moving it into cold storage as we look at the next step of where we go with the Stevia germproziment program.

Speaker 5

Fine. You're doing a lot of your revenue in the international realm and you touch on logistical delays in international It's been my observation that that's caused an enormous number of problems over the years. And I'm just wondering whether I'm late and whether you're attacking this cost area. It Obviously, we went through a period of constrained capacity where you really had to be on the ball to avoid accelerated costs. I think that's It trended down now looking at dry cargo costs, but can you address that issue because it really has not been an area that we've excelled in the past?

Speaker 3

Yes. And international movement of seed is complexed in itself. And then I know of recent years with adding some of the geopolitical pressures on top of it. It's been exasperated even further. So one of the steps that the Australian team which leads this started on is breaking down every single Step between an order and being received by the ordering entity, every single step and looking at the timeline for each of the pieces between paperwork, Testing quality shipping in all the individual pieces And looking at trying to build answers to remove complexity in different steps or make sure that there's current activities wherever there can be, So it doesn't become the lengthy process that we've had in to date, I shouldn't say in the past, but really to date.

Speaker 3

So there's an effort going on with that right now, Nelson, to look at really streamlining process, streamlining steps to improve how we have fulfillment.

Speaker 5

Yes. So a quick question I'm sorry, go ahead.

Speaker 3

I would just say some of the geopolitical issues, I mean, will continue to be a bit of a minefield that we'll try to address As they arise, but anything we can control, we want to make sure we have the most efficient process as possible.

Speaker 5

Yes, I would imagine the comment you made about expenses, holding expenses at $32,000,000 or whatever that's I mean you might be able to do better if you're able to Rationalize certain aspects such as logistics, correct Vanessa?

Speaker 1

That would be accurate. And what Mark scribing is the order to cash process, right, and every step in between. As an example, from the moment, particularly in at Middle East, North Africa area of the world. The lead time required between order and delivery is up to 4 months, right? And that's optimizing the delivery from whether it comes from the U.

Speaker 1

S. And or Australia directly. So as Mark mentioned, we've mapped those processes and aligned when orders come in and the pace of orders to when demand is expected in that 4 month period and including any logistical obstacles in that evaluation and removing them to the best of our ability. Post COVID, at least throughout 20 222023, we were experiencing post COVID obstacles with regard to getting product in that Middle East in North Africa, area of the world. So you heard through our guidance that we've minimized the sales targets for that region to what we feel is achievable for 2024.

Speaker 1

As an example, we talked about the logistic constraints, but the geopolitical environment in Sudan has not subsided to what we initially thought when we had this call 1 quarter ago. So we've adjusted our guidance to include 0 sales in the Sudan region as an example. We continue to monitor it and to your point if there is an opportunity for upside and or getting product into the country for demand, then we will absolutely capitalize on it. But At this moment in time for 2024, we've paired back the expectation in Sudan to 0 and pared back a bit from Saudi Arabia as well. So I think all in when you look at cost containment, outlining processes and optimizing the supply chain effort into these areas of the country.

Speaker 1

It's a high focus for that Australia team as they not only monitor sales growth, but also the cost of doing business in those countries.

Speaker 5

Great. So this reduction in LCM is very welcome from 6.4 to 2.8. We've had some really nasty Surprises towards the end of prior fiscal years with inventory write down. Do you think $2,800,000 is kind of the cost of doing business or do you think can be reduced further. Yes.

Speaker 5

So we're not in the same business as we were before. I mean we've Yes,

Speaker 1

Yes, it's a great question. And Mark and I experienced 8% of sales is sort of what is The industry norm when you think about row crop. I think we can be better than that. There's been a lot of work done in that life cycle management space, just even starting in fiscal early fiscal year 2023 in the crop planning cycle and that continues to be refined as we plan for our crop plan for 2024 sale. So I think we can be better than 8%.

Speaker 1

We are working towards a better metric as we lead into crop planning for 2025, but 2.9 seems well within the norm and manageable for the size of our sales and our crop plans for this year.

Speaker 5

I realize Sure. Some customers can return. Let's hope they like what they get the first time. My last comment, which is probably the most important Shareholders have really not been served well by the share dilution that's taken place over the last 5 years. The shares doubled.

Speaker 5

Without that doubling of the shares, we probably wouldn't be here now. We'd be in somebody else's hands. But Listening to what you had to say, I found very encouraging that the $6,000,000 that will The flow from Shell into the company should be enough to keep us cash flow breakeven in fiscal 2024. And as we look 25, we may even get to being cash flow positive. So I'm assuming That we may not see any more dilution and that would be an important goal of the current management.

Speaker 5

Am I is my thinking correct?

Speaker 3

Yes. Thanks for the question, Nelson. And I don't know if we'd be prepared To talk to it right now and it's probably heavily future looking. But I do believe from what Vanessa and I have rolled out Looking at cash neutral this next year, I do believe in the continued growth of the DT and presic acid Free platforms that are already launched as of this year as we look to the future. And I do think our leadership in technology and sorghum with Full pipeline along with the 2nd generation of post planting grass control.

Speaker 3

I do believe there's a very positive future for continued growth and the results of those We'll likely lead into, to your point, heavy decisions on the go forward as well.

Speaker 5

Well, you're right not to be pinned down, but I've talked to a number of shareholders and that really has been a sticking point, the extraordinary increase in share count and Just want you to be aware of that. Thank you. Good call.

Speaker 3

Absolutely. Thank you.

Operator

Seeing no further questions in the queue, I would now like to hand the call back to management for closing remarks.

Speaker 3

Well, thank you very much, MJ, as the operator of the call and helping us initiate this. I also want to thank The entire group for joining and receiving the information that has been put together as far as S and W's results last year and how we see moving forward. I look forward to our ongoing discussions and appreciate you all joining the call. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
S&W Seed Q4 2023
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