Bioceres Crop Solutions Corp.
Q3 2021 Earnings Call Transcript

Published: 14 May 2021

[Max Goya:]

Good day, everyone, and thank you for joining us. Presenting during today's earnings call will be Federico Trucco, President, Chief Executive Officer; and Enrique López Lecube, our Chief Financial Officer. Both will be available for the Q&A session. Before we proceed, I would like to make the following Safe Harbor statement. Today's call will contain forward-looking statements, and I refer you to the forward-looking statements section of today's earnings release and presentation as well in our recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Also, please note that for comparison purposes and a better understanding of our company's underlying performance, in addition to discussing as reported results during our presentation today, we will discuss comparable results, which exclude the impact of hyperinflation accounting in Argentina. Additional information in connection with the application of the rule IAS 29 can be found in our earnings report. Finally, this conference call is being webcast. The webcast link is available Investor Relations section of biocerescrop.com.

[Federico Trucco:]

Thanks, Max. And thank you all for joining us today. Please turn to Slide two. For a brief overview of the business and financial highlights we will discuss in today's call. As we have done in past calls, we will discuss the progress in the rollout of HB for wheat and soy from a number of different perspectives, including the simplification perspectives, grower onboarding and validation of our value proposition, regulatory activities, sustainability framework and consumer engagement. We will also discuss the realignment of noncore GLA assets in exchange for a 6% ownership interest in molec science. And molecular farming company pursuing a hybrid concept between plant and cell based technologies for the production of animal free food solutions. From a baseline business perspective, we will discuss some reorganizational activities implemented after our second quarter results and are starting to bear fruit for significantly in our drop nutrition segments, with a four times increase in microbiotic fertilizer sales year-on-year, resulting in a 35% total comfortable revenue growth for the quarter. These top line growth, combined with operating leverage enables the company to deliver improved adjusted EBITDA and margin expansion during the reporting period, positioning our financial profile into the double digit growth trajectory on an LTM basis. Now, let us discuss this highlight in greater depth. Please turn to Slide 3 for an update on the upcoming HB4 reproduction season. The strong performance of HB4 wheat varieties observed during the last crop cycle and reported in our second quarter’s earnings call has created an excellent preseason momentum, with contracts already in place for over 60,000 hectares our baseline target prior to Brazil input approval. We have collected and will continue to collect invitations for additional hectares until the end of May. And we will only turn these invitations into contracts with . Last season HB4 wheat are yielded combined share of varieties by 13.5% across all environments and locations, and up to 42% in low yielding environments. As we look forward to the planting season. We currently have 200 flowers engaged across 550 locations with a near 100% customer with deep rates with past participants more than tripling the number of hectares planted last year. Clearly, this strongest adoption validates the HB4 value proposition as of today contributed goods for an age before wheat hectare average approximately $100 with a gross margin above our company wide average. In terms of financial reporting, the value of these contributed goods will be recognized as revenues once the realized inventories are sold as seed or grain and no longer contributed into signal duplication agreements. For the time being this has a financial benefit for the company as the corresponding gross profit from contributed goods, implies that less cash is required for the HB4 inventory buildup process.

[Enrique López Lecube:]

Thanks, Federico. Good day to everyone. And thanks for joining us today. Before entering into financial performance review, I would like to recall that during the quarter we completed the transfer of our listing from an Asian American to a Nasdaq Global Select Market. We are grateful to NIC for having been such a great host, due more than two years since our initial listing back in March 2019. We're now thrilled about our new partnership with Nasdaq. It is an ideal fit for us as they would present some of the leading biotech technology and Ag Tech companies in the world. This move also aligns with Bioceres's current ESG initiatives, and Nasdaq's ESG platform and suite of products and services. Now getting to the financials, please turn to Slide 10 for a review of their revenue performance during the quarter on an NPM basis. Even when our fiscal third quarter is the slowest from a seasonal perspective. This year, we had an outstanding performance with a historic high in values, soil comparable revenue rose by more than $9 million from $26 million in the third quarter of fiscal year 2020 to $35 million in the third quarter of the current fiscal year. A 35% increase. On a reported basis the increase for the quarter was slightly above 40% from $25.7 million to $36.2 million. Crop nutrition expansion was behind the growth achieved during the quarter characterized by the lack of planting activities across the market to which we operate. As we discussed in previous calls to smooth down the effects of seasonality and have a good grasp of the midterm performance of the business, we also keep a close eye on the trailing 12 months. The exceptional performance in a rather usually low season quarter got us back on track with growth. Leaving behind the slowdown we have seen the second quarter.

[Federico Trucco:]

Thanks, Enrique. We will now open up the floor for questions. And after that, we will add some concluding remarks. Operator?

[Operator:]

Your first question comes from the line of Ben Klieve of Lake Street Capital.

[Ben Klieve:]

All right, thanks for taking my questions. And congratulations on a really good quarter here. On the quarter itself, I have a question about the fertilizer business, I'm really trying to understand who was buying their high volume of product here. I understand you're using your plant more efficiently revenue strategy. But I want to understand really who really drove this volume? I mean, was it greater exports was that, existing customers buying more volume? Was it new customers reached by the new strategy? You know, any color on this will be helpful?

[Federico Trucco:]

Hi Ben, it’s great to have you in the call, this is Federico. I will ask that specific question to Enrique.

[Enrique López Lecube:]

Hi, Ben. Thanks for joining the call and for your question. I think we take your question; it is a combination of a couple of factors. There was customer repeat rate that was very good. But also we have increased volumes per customer, as well as new customers. So I think that the new pricing strategy is working fine in the sense of increasing volumes per customer, and also bringing in new customers. So those are the two variables that we have been monitoring so far in the beginning of this new pricing structure. Most of this happened in the Argentinian market initially. We still have to wait at least a quarter to see if there's an impact coming from neighboring countries or neighboring markets such as Brazil. By the way if you know, we had been selling the fertilizers, and basically the through microstar . But those are the values that we have been monitoring and so far, we are happy to see that new customers are joining the technology.

[Ben Klieve:]

Got it. Thanks, Enrique. That's helpful. I like to pivot over to a couple questions on HB4, Federico, I have a question for you regarding the timing of the commercial launch for both the wheat and the soybean product. You talked in your prepared remarks about the needs of Brazil and Chinese approval for import to support a commercial launch. If these approvals don't come here in the next few months, you know, do you still plan on launching these products locally with an identity their supply chain or do we really need those approvals to come here to enable a launch in six months from now?

[Federico Trucco:]

But that's a very good question, Ben. In terms of wheat the contracts that we already have in place for 60,000 hectares are contracts that we can execute within the identity preserve approach, regardless of the approval. Initially, we indicated a range between 60,000 and 130,000 hectares. The top number that would require approval, we continue to identify interest and if a Brazilian approval is obtained before early June, we will probably have some additional acres into the identity preserve channel. But all we're doing now is identity preserving in terms of wheat. In the case of soy, the next cycle is somewhat agnostic to the Chinese approval, since we're planning to do all of that underwriters will be preserved anyways. Remember, we still have small inventories in terms of soy. So, we won't be affected in the coming cycle, what will dictate the number of hectares there is a quantitative receipt being obtained now and the performance of the different varieties of seven materials that are currently being multiplied now. Going into 2022, for us to launch above where we will be from out of the next cycle soybeans would require an approval. Because identity preserved will be tough to manage above the 500,000 hectares level, if you will, and we still are not sure in terms of how efficiently we will be able to do this. But that might be more challenging. This is something we can do fairly well today, particularly with the use of the digital platform. But our ability to move above that 0.5 billion mark with identity preserved, it's one that we are not fully certain of as of today.

[Ben Klieve:]

Got it. That's very helpful on both fronts. Question about the Havana agreement? I know, I understand that it's maybe too early to get much information on this, but do you have a sense of if they're going to be basically integrating with flour from HB4 wheat into their existing product line and as such, they would be an almost immediate consumer of that wheat or are they going to be engaged in kind of a long R&D process to figure out the right products for that wheat to go in? I'm just trying to understand if this agreement is affecting the immediate term commercial launch or if this is kind of a longer-term thing?

[Federico Trucco:]

Thanks for the Havana question. To us, the Havana agreement is more qualitative than quantitative. As we tackle this monumental quest with HB4 wheat, we work on the development side, scaling up inventories, the regulatory front, and we work on the commercial aspects and we also need to work on consumer engagement. These last considerations, the one that drove us to Havana agreement, this is not with flour that will be immediately incorporated into all of Havana product lines. There will be a specific product line with the HB4 claim, where we intend to show the water and carbon footprint underlying these particular products and in doing so, initiate a conversation with consumers. This is not meaningful from a volume perspective in terms of how much flour might end up in this particular channel, but I think it does create validation and greater comfort for other food processors. That might be sort of concerned about the GM aspects of HB4 wheat and where we can sort of come back with data from consumers and from performance to generate greater comfort in these particular product lines. That's the approach we intend to announce other agreements with consumer brands for HB4 wheat and trade without a platform of consumer engagement, to build on this last aspect of, if you will, around the social license required for a product of this nature.

[Ben Klieve:]

Got it. Very helpful. That's great, you guys are able to secure that first agreement. I think that does it for me. I appreciate you taking my questions and I'll get back in queue.

[Operator:]

Next question comes from line of Kemp Dolliver, Brookline Capital.

[Kemp Dolliver:]

Good morning. I have two questions. The first one relates to the crop protection business and the strategic adjustments you're considering, could you give more detail with regard to the types of actions that you plan to take?

[Federico Trucco:]

Thanks again for joining the call and thanks for the question. What we would like to do there in the protection side is uncouple -- if you will, the proprietor adjuvant business with the post-patent products, some of which are third party products, that we usually commercialized also in that segment, I think, that if we are able to have dedicated teams and structure alternative channels for these two types of products that we currently commercialized in the segment, we are likely to achieve a better performance. That is kind of the reorganizational angle that we are pursuing and that we believe will show some incremental growth in the fourth quarter of the current fiscal year.

[Kemp Dolliver:]

That's helpful. Thank you. The second question relates to Verdeca and now that you have complete ownership of it, the next steps you plan to take with regard to building out that part of the business?

[Federico Trucco:]

I don't know if it's my voice or yours, but it's sort of fading away. If you can repeat the question?

[Kemp Dolliver:]

Yes, I hope this is better? The second question is your plans with Verdeca, now that you have 100% ownership and some of the specific actions you're planning to take now that you totally control it?

[Federico Trucco:]

Okay. So if I understood correctly, the question is around the full control of Verdeca and how we intend to sort of move forward now that we own 100%. Essentially, what that is doing for us is giving us greater flexibility in engaging with third parties for the development of alternative geographies, mainly in the US and to some extent in Brazil, where we have historical relationship with TMG. We are now actively working to secure germplasm that is complimentary to the one we currently have in Verdeca to be able to address these additional geographies. For instance, there's a meaningful area of the US where HB4 can potentially deliver significant value when we need materials that are maturity groups to and below, which we currently do not have within the Verdeca breeding programs. So that is one space where we are looking to secure relationships with germplasm providers that are already on boarded with HB4, so that we can have that particular opportunity which is upwards of 1 million hectares. Similarly, for maturity groups, six and above, which are important in some areas of Brazil and other tropical regions of the world, we can now engage without the necessity to negotiate with our partner in the JV because we fully own it, so that we can have relationships that allow us to have an incremental hectare addressed with HB4. That to me the most powerful aspects of controlling the JV in full.

[Kemp Dolliver:]

Great. Thank you very much.

[Operator:]

As a reminder to ask a question, please press star one on your telephone. Your next question comes to line of Steven Ralston of Zachs.

[Steven Ralston:]

Good morning. Thank you for taking my question. I'm sorry, I was in the middle of transitioning from the webcast to the telephone during the first question, which really was about the micro-bead fertilizer. I had assumed that because there was the delay of the soybean planting season this year, that sparked the incremental demand of micro-bead fertilizer, is that correct? I'm sorry, I missed that first answer.

[Enrique López Lecube:]

Hi, Steve. This is Enrique. Thanks for joining us for the question. If I understood correctly, you're referring to the seasonality of increasing sales from the micro-bead fertilizer, correct?

[Steven Ralston:]

That is correct.

[Enrique López Lecube:]

Yes, the increase in sales that we've seen in micro-bead fertilizers is corresponding to the season, to the winter crops planting season in Argentina. So this is kind of like the beginning of sales for winter crops, mainly wheat in Argentina. So that is where we're seeing an increase. Obviously, this is a product that is even more suited for soybeans. So that is something that makes us be optimistic about the shift. If we are able to capture demand for winter crops, then these value propositions should be working even better for some crops. But to your specific question, this is the month for the winter crops planting season in Latin America and more specifically, Argentina.

[Steven Ralston:]

Thank you. In the second quarter call, you've mentioned that there was an increase in commodity fertilizer sales that were competing against the micro-bead fertilizer of bio series. Did that fade out some or is there another dynamic about the commodity fertilizers?

[Federico Trucco:]

Steve, hold on a second. Operator, can we switch to the backup line, because we're having a lot of difficulties with this line?

[Operator:]

Yes, one moment. Okay, the backup line has been transferred.

[Steven Ralston:]

Do you want me to repeat the question?

[Enrique López Lecube:]

Yes, please, Steve. We can hear you much better now.

[Steven Ralston:]

Thank you. In the second quarter call, you mentioned that, basically, commodity fertilizers were gaining share and that's one of the reasons for the lower level of micro-bead fertilizer during your second fiscal quarter. Did that dynamic change as you went into the third quarter?

[Enrique López Lecube:]

Yes, that's a very good question. So, absolutely, I think that the uprise that we've seen -- the steep uprising in commodity prices has made farmers more technology inclined. So, farmers are backing track with adopting new technologies that provide ROIs even when they require more investment. This is the perfect scenario for the micro-bead fertilizers, where you might need to have a technology adoption versus conventional technologies. That is something that's a material change since -- from the second into this third quarter, and even more now with the commodity prices as you're seeing this particular month of May.

[Steven Ralston:]

I'm sorry, I didn't see it. But what is your capacity figure now? You usually give it on a 12-month trailing basis of the micro-bead fertilizer plant?

[Enrique López Lecube:]

Yes, so we moved on a trailing 12 months basis, we moved from 25% to 34%.

[Steven Ralston:]

Thank you. Also to tag on to the other analysts question about your reorganization, I would assume that they're going to be costs involved in building up these dedicated teams to emphasize your branded products in crop protection and seed. In your comments, it seems like you're also going to deemphasize the micro-bead fertilizer and maybe I read too much into that?

[Federico Trucco:]

No. Let me be as specific as I can to state, but in terms of the micro-bead fertilizer, the strategy was already put in place and what is yielding results today and we are reporting the current quarter, it's more around pricing and scaling up capacity so that we can retain the same level of profitability. As we become more price competitive, obviously, improved commodity prices, that has sort of incremental effect beyond what we read ourselves that is creating the kind of outcome that you're seeing in the current numbers. Now, that's the crop nutrition segment. In the crop protection segment, we are not investing in a new team, we're just reassigning, if you will, resources that we currently have. We don't expect to see a significant increase in sort of operational costs or management costs to have the strategy in the crop protection segment put in place. It's essentially a channel strategy, where we are operating two different channels instead of just one and already have one channel dedicated to the high value products, the other one's where we make significant profits and another one for the post-patent products that we commercialize as a compliment. Finally, on the on the seed front, which is something we expect to be in place in the second half of this year, what we are doing is also structuring an alternative channel for the conventional seeds. This is not inclusive of HB4 program, this is just for the conventional soy and wheat we currently sell and expand on that portfolio. So that we can materialize the number of synergies with our existing organization. Those are the two reorganizational initiatives that will be executing in the coming days and months that we expect will reignite growth particularly in our main market of Argentina.

[Steven Ralston:]

Just to rephrase, it sounds like the goal of a program is to enhance your product mix to your higher margin products?

[Federico Trucco:]

So, if you will, our current channel will be more dedicated to that. That is correct. But that is not to the detriment of the post-patent products that we can resolve. Because there will be an alternative channel operating on those that we expect will generate growth as well.

[Steven Ralston:]

Alright, thank you for taking my questions.

[Operator:]

Your next question comes from line of Matias Cremaschi of Delta Asset Management.

[Matias Cremaschi:]

Hi, guys, good morning and congratulations for the results. I am wondering if you can comment on the rationale of the acquisition of and what type of incremental revenue or synergies do you expect to capture there?

[Federico Trucco:]

The rationale is right on the line of what we discussed before in terms of the crop protection segment to provide an alternative channel for post-patent products so that we can have our Rizobacter channel fully dedicated to adjuvants and biologicals. That we do sell like the bio fungicides for instance, they are very important to us.

[Matias Cremaschi:]

Thank you and any color on synergies or incrementality there?

[Enrique López Lecube:]

Hi, Matias, this is Enrique. I think that question is kind of like overlapping what Federico said about the channels. I think that the synergies that you might see there is basically having specific channels for specific types of technologies. So, this is a channel that can be better at commercializing lower technologies or products that are replacing commercial technology. So, there might be some synergies also, some opportunities for fertilizers for example, to further get capillarity on the market through this new channel, but needs to be seen and that is not something that we are comparing ourselves today. But there might be some opportunities for products that replace conventional technologies.

[Matias Cremaschi:]

Okay, great.

[Operator:]

At this time, there are no further questions. I would now like to turn the call over to Federico for any closing or additional comments.

[Federico Trucco:]

Well, I want to thank everyone for joining. I think we are at an inflection point in the company as we gain a significant momentum with not only the baseline business, but also the HB for progress. We appreciate everyone's interest that we remained fully available for follow-ups and wish everyone a great week.

[Operator:]

Thank you, that this concludes today's conference call. You may now disconnect.