All right. Hello, everyone, and thank you for continuing to join us throughout the day here at the Lytham Partners 2024 Investor Select Conference. My name is Robert Blum, Managing Partner of Lytham Partners, and during this fireside chat webcast, we welcome S&W Seed Company, ticker symbol of SANW (Nasdaq) . Joining us today from the company is Mark Herrmann, S&W's Chief Executive Officer. Also joining us today is Ben Klieve. Ben is the Senior Research Analyst with Lake Street Capital Markets, whom I've asked to moderate today's fireside chat. Ben covers a wide array of food and agribusiness companies at Lake Street, including S&W. Before I do turn it over to Ben, I want to remind everyone that management is available for one-on-one meetings throughout the conference. I know we still have a couple of hours left.
If you have not already signed up for a one-on-one and would like to do so, you can send me an email that's blum, B-L-U-M, @lythampartners.com, or you can visit the website, lythampartners.com/select2024. From there, you can click on the investor registration link and make your one-on-one selections. If we don't get you taken care of during the conference today, certainly look to get you taken care of here in the weeks to come as well. One final side note: Ben and I just finished up an analyst roundtable today that sort of took a deeper dive into the broader ag markets. If you were not able to join us live for that and would like to listen to a replay, again, go to that website, lythampartners.com/select2024.
There's a Presentations tab in the top left-hand corner, and from there, you can listen to a replay of the webcast. So, thank you all for joining us today. Ben, Mark, thanks so much for your participation. With that, Ben, I'll turn the floor over to you.
All right. Thanks a lot, Robert. Thanks for having us. So, as Robert said, I'm the resident food and agribusiness analyst at Lake Street Capital Markets, and covering analyst here for S&W Seed Company. Before I turn it over to Mark, I want to kind of quickly outline what I think all you investors can expect to hear throughout this call. So, you know, S&W, this is a seed company that develops and commercializes seed in crops like alfalfa and sorghum. These are crops that aren't necessarily as well known as peers like corn and soy, but still planted on millions of acres in the U.S. every year and tens of millions of acres globally.
S&W is a long-established leader in this space, and that leadership position, in my view, is expanding by the year as they become a technical leader in crops, especially in sorghum. But that said, this is a company in transition. In the last couple of years, there have been some very positive developments in that transition, but also some challenges that they have worked to overcome, both internal and external in nature. You know, the latter kind of issues over the last couple of years have really been driving the stock downward, and while some decline has been deserved, I firmly believe that the sell-off here has been significantly overdone. I think what you're looking at today is a company that is materially discounted at the current valuation.
Today, from Mark, I expect we're gonna hear his description of a company that's doing things, doing the right things and making considerable progress in areas that have been challenging in the past, and also areas where the momentum that they've had is continuing to build. My view is that these dynamics here are going to continue over the next year. S&W is pivoting to sustainable profitability, and that there's a lot of upside to be had here from where the stock stands today. And I think everybody on the call is gonna walk away from this with that perception as well. So, with that, Mark, thanks for joining me today.
Hey, good morning. How you doing, Ben?
I'm great. It's good to talk to you as always.
Good.
My first question for you that I think is going to help kind of frame this conversation for investors is, you joined S&W as full-time CEO about six months ago. I'm wondering if you can highlight to investors newer to S&W generally or your leadership kind of what you were brought in to do at S&W Seed and what enticed you to take the position?
Yeah. So, appreciate it. You know, really my first interaction with S&W, I joined the board in December a year ago, by the request of Mark Wong and the chair, Alan Willits. And really, even the joining of the board was focused on the fact that I've really spent my entire career managing seed businesses, both seed companies with trait launches, and taking those products commercial and growing them into becoming significant players in the marketplace. You know, understanding farmer value and delivering that forward, as well as running all parts of the operational pieces of the seed industry, right? So I came in in December with it, and then when Mark Wong retired in May, is when the board had asked her me to join as CEO.
But I really believe the move was for the exact same reason. It's focusing on the operational piece of bringing traits forward. As you know, with our trait portfolio, we've got now two of the traits launched, or actually three, launched over the last three years, and we're preparing to launch two more here over the next three years as well. But it, as well as the opportunity to drive for operational excellence, right? Everything that makes a seed company efficient, whether it shows up through production efficiencies, which come out through cost of goods savings and shows up as margin, or it shows up as OpEx savings, but making sure we're doing things that make really strong sense for a well-run seed company in the marketplace.
... That's great. That's, that's, very helpful overview, Mark, and you kind of hit on several of the things I'd hoped to address here, including what I hoped to target next, which is, you know, some of the issues historically with S&W. There's an awful lot to like, a lot of positive catalysts that I think are under the hood here and overlooked that we'll certainly spend the bulk of our call on.
I'm hoping you can maybe double-click on a couple of the challenges that S&W has seen historically that are being addressed by you or maybe have been addressed, you know, before your time, around operational efficiencies, inventory management, things of that nature, that are really gonna help drive more sustainable profitability going forward.
No, that's, that's great. There are both internal and external pressures as we look at... You know, if I hit on some of the external pressures, probably the most notable is our MENA market in the Middle East and Northern Africa. But really it started with the Ukraine-Russian War and Saudi Arabia, which is a key customer, providing premiums for farmers to raise wheat instead of other feed crops or food crops, which moved the market a bit. But we saw that move into the next, about a year ago right now, Ben, the Sudan civil war kicked off, which really blocked all Sudan order and activity with a key customer.
And now we've seen that expand here with the issues going on with Israel and Palestine and how that's expanding through Middle East pressure, including the Red Sea being pretty much closed to trade. So to me, that'd be a pretty textbook case of an external pressure to a business that we believe will be time-stamped. Eventually we'll move back to more normalcy, but we need to manage as best we can through it. On the internal pieces, there were just a lot of efficiency opportunities. So some of them are that S&W over the short-term history has been focused on a lot of breakthrough, either crops or discovery directions.
As we came in evaluating the business and evaluating our cash position and liquidity, is really identifying which ones are going to contribute to short-term financial contribution or profitability or and which ones aren't, and really making the tough decision of either shutting down some programs, selling some programs, and/or changing our relationship within some some JVs. We also did evaluation, particularly through the Australia business, of facilities, facility management. As you know, several of the businesses were bought through different acquisitions, but then coming back to rationalize those to a high level of efficiency was still a step that needed to be done, and we're in the process of implementing those over the next 12 months.
And then I come to the other internal pressure, really, how do we really focus this entire company? I don't know if it's an internal pressure or just a clear strategy. How do we get this company driven towards a focus of getting to profitability as quickly as possible and creating cash for owners, shareholders, and others as we move forward? So those have been the significant focuses over the last six months.
That's great, you know, with investors, I want to stress here is I think Mark has clearly come in with an exceptional pedigree from the perspective of running operations like S&W, running seed businesses that in doing so in an efficient and profitable manner. And he has taken a lot of initiatives over the last six months that have built upon some initiatives that were begun before his time that really are gonna help streamline this operation, and really help kind of accelerate their return to profitability here.
So I think there's been a lot of good action taken here over the last six months, and I think that's really gonna begin to show in a material way on the income statement here over the next year or so, as they really start to, you know, start to show their full effect. You know, you talked about trait development. You know, one of the traits that I know you're uniquely excited about is Double Team. I'm wondering if you can just kinda give-
Right
... investors that are maybe newer to the story, kind of a high-level overview of this product today, and then talk about the economics of Double Team for both your farmer customers and S&W versus kind of other sorghum varieties that don't necessarily have high-value traits bred into them.
No, that's great, Ben. I look forward to that. And if I could, I'd even start with just the importance of sorghum overall. So, sorghum isn't a crop that's hit a lot of continuous headlines, but it's an amazing crop that offers a lot of opportunity to a lot of social food security and other issues that we face on the planet. Sorghum is the fifth largest cereal crop on the planet. It's highly nutritious. Numerous geographies globally use it as a food crop . Others use, like the U.S., it's heavily a feed or a livestock food crop. But it's in a very important crop overall, and some of the reasons it is very important is that it is highly tolerant of high temperatures.
So as we look at the changing climate and we look at numerous geographies that do have food security issues. Being able to handle high temperatures is an important crop requirement. As well as that, and it goes hand in hand, sorghum can actually finish a crop with about a third less water than corn can. So as far as water utilization, and that's whether you're looking at the intense irrigated areas in the U.S. where there's concern about aquifers being pulled down, where you could use or consume less water to finish a crop, or if you're talking in more arid places where there's just full-on more limits to water availability that are problematic. But the fact remains that it's a very important crop.
We actually believe that right now there's about 15 million acres in our four global target geographies. But we fully believe that there's an opportunity for those acres to increase significantly, provided farmers can get tools to help with the successful production of the crop. And when I say that, if you look at crops that have moved into to acres that sorghum used to be grown in, it's heavily because of either tools that allow for weed control, tools that allow for insect defenses by the plant that are available in other crops. And the investment in sorghum research has been fairly limited.
So S&W breaking out of that mold and really making an effort to come up with trait tools that are non-GMO, that can really contribute to farmer success in raising a sorghum crop efficiently and profitably is a huge contributor. So DT is a tool that's non-GMO that we've bred into sorghum plants that allow the sorghum plant to be resistant to FirstAct herbicide, which controls grasses. And sorghum is basically a grass itself, so controlling grasses with a herbicide in the sorghum crop has always been very difficult to do. And the yield impact, the negative impact on yield, grass pressure can have is huge, as well as, as if you have weeds in your field, particularly grasses, you're also consuming water that the sorghum plant then doesn't have available to it.
So your water consumption per bushel of production, also is less, less efficient. So it's a very important technology. We actually launched it just three years ago on a small number of acres, and this year we're fully on pace, to be on over 10% of the U.S. sorghum acres with this trait. So it's running at a pace that I would say, historical crop traits, that have become base traits have operated under. I was involved in the launch of Roundup Ready Corn with the DEKALB brand, and then as part of Monsanto across Asgrow and the other brands that we licensed to. And even without the support of Pioneer in corn, Roundup Ready became a base trait throughout the U.S. on corn.
But it took Roundup Ready 5 years to be on 10% of the U.S. corn acres. So we're extremely excited about it and do believe it'll make a huge difference. We also launched DT forage sorghum this year, which offers the same opportunity to control grass in forage sorghum. And then we launched in limited trial a trial launch this year of PAF, which is prussic acid-free, which provides for a safer animal feed to remove a toxin that's dhurrin is a precursor of, which turns into prussic acid, which for ruminant animals like cattle, if they're fed at the wrong time, where there's concentration, can lead to livestock death. So this trait, we have an exclusive position on license from Purdue University.
But as we look to the future, we've got our second generation of DT coming, which will give a wider window of herbicide application. Then we're also looking here over the next two years, being able to launch the first Stack Trait in sorghum, which will be DT and Prussic Acid Free. Then we also have a portfolio which is working on discovery with insect traits, which would be equally important to grain sorghum as it is to corn, as well as a non-GMO approach to broad leaf or broad spectrum weed control opportunity for sorghum. So the exciting thing is the single trait that's been launched to date has been wildly successful, you know, well-accepted by farmers and has really had a penetration rate that's exciting.
But as I look at the entire portfolio as we go forward, I believe we'll continue to add value to sorghum production for farmers, which also translates into value for the seed product growth, as well as margins, for our company. So we just, we couldn't be more excited about the sorghum platform that we've got and how we're moving forward to ensure we can keep addressing the market needs with it.
Yeah, that excitement is for good reason. And a couple of things to help kind of frame this for investors. So, you know, Mark said they're expecting Double Team to be on 10% of sorghum acres. That's hundreds of thousands of acres in the U.S. And their guidance for fiscal 2024, June fiscal year, is between $11 million and $14 million of revenue from this product. So this is, you know, we're getting into real numbers here, in just the third year of commercialization for this product, and I expect growth to continue here well beyond this level. From a margin perspective-
And just could I add to that? Since we're focused on moving to a profitable position, it also moves sorghum seed from a 30% margin product to a 60% margin product, right? So as we see the penetration of this, it's definitely a fantastic catalyst to keep moving us into a profitable position. And I believe our growth and share, our growth and presence in the marketplace will have a lasting period with the depth of the portfolio.
Thanks, Mark. That's exactly what I was gonna say. When you look at the margin structure of a seed company, the seeds that have high-value traits integrated into them can command significant gross margins, because of the benefit that it provides the farmers, and because of the cost associated with developing that trait over years or decades to the seed company. So, you know, that 60% gross margin number that Mark just said, that's a real number. I mean, you're talking SaaS-type revenue, or SaaS-type margins here for sorghum seeds. So that's one of the reasons why I'm so enthusiastic about the opportunity of next-generation seed companies like S&W.
So, a very interesting development here and one that is very much discounted today, and that's only, I think, going to accelerate here as not only the existing traits get additional market share, but new traits come into market that Mark just described. So, a very helpful conversation there. Thanks, Mark. You also earlier in this call started talking about JVs that have been developed. You know, one in particular that I wanna just kinda hit on a very high level, we don't need to get into the details, but is the agreement with Shell. Around this time last year, you struck a JV with Shell.
Can you just talk about, on a high level, what this JV is, the cash impact on your business, and any kinda long-term expectations that you can, that you can highlight?
Yeah. So, we were working with an effort on a crop, which is Camelina, which is from the family of the canola family, but it's a short season crop. It also grows in very cool temperatures, and it's a very high oil content crop. With the focus right now of biofuels, particularly, as you get to tighter standards which qualify as a sustainable biofuel, is ensuring that it's not trading off other crops, which are primarily food crops, but truly coming forward as an additional production opportunity. Camelina just makes a fantastic feedstock for biofuels.
So we have a JV called VBO, and it was a JV struck, as you said, right, right at a year ago right now, struck with Shell, and it's a 66.34% partnership JV. We've got the remaining payment of $6 million coming this year in February, which actually, with that contribution, we believe our cash needs for this year will be covered as we look at as we go forward. But the crop is focused at helping farmers have a third crop, which can actually effectively be used as a cover crop. So plant it in the fall, it grows into the fall, into the winter, recovers growth in the spring, and then finishes early.
So when you take off the camelina crop, you can come back and then pack plant your follow-up crop. So effectively getting three crops rotation in a two-year period. So we believe it's positive for the farmer financially. It's positive for the farms and keeping a cover crop through the winter months, so farmland isn't open. And it's a very effective, very energy-dense plant to be able to use, particularly as you look at SAF's sustainable aviation fuel. So on the agreement is what S&W contributed was germplasm, expertise. There's a production plant that transferred from ownership from S&W to Shell a year ago, and then contracting the farmers, supporting the farmers with management practices for raising the crop, and then taking it to harvest.
And then Shell has a commitment to do an offtake of 100% of the acres that are planted, to then gather that, ship it, take it to a crusher, and move it forward in the biofuels categories. So it's an exciting opportunity for us to be working with Shell. It's got huge growth opportunity as we look forward. So far to date, it's hit all of its key, you know, targets as far as acres contracted and acres produced. So to date, I mean, it feels very, very positive in how the JV is performing and moving forward.
Very good. Yeah, that's that was a uniquely exciting development, I think. A couple of very quick points for investors here. So first of all, Mark just talked about a $6 million inflow coming in, I think next month, actually.
Yep.
That is in addition to $13 million of additional capital or debt assumption that took place. So this is a $20 million capital infusion immediately, plus a third of the ownership of the JV, with optionality to get up to 50% here over the next few years. This is a big deal. And one thing that you can point to in the private market as a comp, there is a private company, pre-revenue, very similar business model called CoverCress. It was bought by a combination of Bayer, Chevron, and Bunge for, for my estimate, $200 million out of a pre-revenue state.
There's a lot of similarities here between this business and the JV S&W has with Shell. And again, S&W owns a third of that JV today and will be 50% here in the not-too-distant future. So just a materially more valuable asset than is inferred by the market cap today. Mark also hit one other question that I had that I was going to add, which is around cash needs. That $6 million contribution that's coming in from the Shell JV, Mark said, is effectively gonna offset any cash needs that this company has on this fiscal year.
And so, you know, for small micro-cap investors concerned about dilution risk, this is not a company that I think needs any kind of material equity investment here to fund operations. Again, they're about break even this year, and I think you can look to about break even next year as well. So plenty of flexibility here, and very little dilution risk right now that investors... So investors don't need to be worried about that, is my belief. You know, I'll wrap it up here really quickly and just kinda reiterate here a couple of things that investors I hope you all heard today. Now, this is a microcap company, but it's one that's in much more solid financial shape than is implied in the valuation.
After a couple of difficult years, I think Mark here has really done some things to improve the base business and drive this company to profitability. As that pivot happens here and this becomes a sustainably profitable company, I think there's an awful lot of alpha to be realized here from the current levels. So, there's a lot more to discuss on this stock. I'd encourage any investors interested to reach out to me and take a deeper dive into this business 'cause it's, I think, a very interesting company that is materially discounted at the current level. Robert, before we pass it over to you here, Mark, I just wanted to see if you had any closing comments here for investors on the line.
No, I appreciate the opportunity to visit, and I will also emphasize, and you did it very, very well in your summary. It's exciting to move from the purely research, investment, discovery stage into the commercial stage, right? And as we look at both the sorghum portfolio globally, as well as the opportunity with the VBO JV, and we look at the operational efficiencies across the entire business, I do feel very positive about the future as we look ahead.
Yeah, with good reason. I appreciate that. Robert, with that, we'll pass it back over to you here.
Fantastic, guys. Thank you so much for your time today. Certainly found very informative. I hope our audience will as well. Again, just a couple of quick comments there. Again, if you'd like to schedule and coordinate a one-on-one meeting with management, please reach out to me, blum@lythampartners.com, or again, go to the website there. Similarly, if I can help coordinate any introductions to Ben there, feel free to reach out to me, and I'll make sure to do that as well. Again, if you missed our early analyst round table between myself and Ben, please go back to the website, lythampartners.com/select2024, and you can click on the presentations tab there, and listen to a replay of that.
So, again, Mark, Ben, thank you so much for your time today. Greatly appreciate it. We hope everyone enjoys the conference here.