Marrone Bio Innovations, Inc.
Q1 2021 Earnings Call Transcript

Published: 13 May 2021

[Operator:]

Good day, and welcome to the Marrone Bio Innovations First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Linda Moore, General Counsel. Please go ahead.

[Linda Moore:]

Good afternoon, everyone, and thank you for joining our call. Welcome to the 2021 first quarter earnings conference call for Marrone Bio Innovations. On the call today are CEO, Kevin Helash; CFO, Sue Cheung; and Matti Tiainen, Senior Vice President of International Sales. If you would please refer to Slide 2, I would like to remind you that this conference call may contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding management's future expectations, plans, projections, forecasts, and prospects.

[Kevin Helash:]

Thank you, Linda, and thanks to everyone joining us on the call today. We are now one third of the way through the year, and I would point to three key indicators that will continue to define our success in 2021. One, we are progressing rapidly toward delivering breakeven on an adjusted EBITDA basis. Our first quarter results support this financial target and Sue will provide more color on our numbers in a few minutes. Two, we were accelerating our commercial expansion on multiple fronts and Matti will provide an update on our global launch plants in the large-acre row crops. And three, we intend to be the leader among our ag biological peers in terms of bringing sustainable products to the market. I'll speak in a moment to an important study we recently published that supports this position. If you would turn to Slide 3, I'm very pleased with the start to 2021. As we have noted before the first quarter is a seasonally slower period for us and one that is driven by our specialty crop business in the United States. This foundational sector continues to deliver, and we expanded our market presence in this high value segment. We reported our 11th consecutive quarter of increased revenues and our 10th consecutive quarter of gross margins above 50%. As we committed, we are being judicious with our spending. First quarter operating expenses declined on an absolute basis by 11% and the ratio of operating expenses to sales was 91%. Both metrics are a testament to our ability to grow revenue and margins while strategically managing costs a feet not easily accomplished in any company. If you would refer to Slide 4, we believe this quarter was an early indicator of our capabilities and of our upward trajectory as we approach breakeven on an adjusted EBITDA basis. We remain highly committed to our core business in the specialty crop markets. However, given the market size and global reach, seed and soil applied products and the major row crops represent a tremendous opportunity for us. We have been serving this market for just over four years and have grown our offerings from one product to five. We are launching four new products this year, three of which are seed treatments and all four of which are targeted for use in the broad acre row crops.

[Sue Cheung:]

Thank you, Kevin, and good afternoon to everyone on the call. If you would turn to Slide 6, our performance year-to-date give us confidence to raise our outlook for 2021. We have increased our revenue growth forecast to the upper 20% of range in line with our historical revenue CAGR. In addition, we have raised our annual gross margin target to the upper 50% of the range, which also reflect a more positive outlook for the year. We expect to keep operating expenses flat while ramping up revenues and the margins.

[Matti Tiainen:]

Thank you, Sue. And it's a pleasure to be part of this conversation today. As Kevin noted the market for seed and soil applied treatments in the major raw crops and broad acre is an exciting growth opportunity for us. The global seed treatment market is forecasted to grow at approximately 12% CAGR through 2025. Our growth rate however in revenues from seed treatment over the past four years has been more than double of that the industry has had, and we expect our outside growth in this area to continue. We're offering the right products at the right time. In four short years, we've expanded our seed treatment portfolio from one product to five products. We expect MBI biological seed treatments will be used in approximately 11 million acres of soybean, corn, and cotton in the United States this year. In Europe, we anticipate more than 24 million acres of corn; sunflower and rapeseed will be treated with products based on our UBB technology in the 2021 planting season. If you will now turn to Slide 8, we're launching three new seed treatments in the EU market

[Operator:]

Thank you. And we'll go first to Sameer Joshi of H.C. Wainright.

[Sameer Joshi:]

Good afternoon. Thanks for taking my questions. Congratulations on a good quarter. You have this metric that you have introduced a couple of quarters ago called the operating expense ratio. It is nicely draining at 91%. How – in terms of operating leverage what level of – how low can this go?

[Kevin Helash:]

Hi, Sameer, it's good to talk to you again. It's Kevin here. So in terms of our operating expense ratio, it's an indicator to us of our gross profit trajectory. So in terms of how low can it go? We continue to see our operating expenses trending at 2020 plus inflation. And we're very fortunate in that, at that level we believe we can continue to drive the growth – the top line growth in our company in the upper-20s and our gross margin rate in the upper-50s. And so for continuing operations, we feel with that baseline is sufficient for us to move forward. Now, I would say that if we see an opportunity to invest in the company that will drive up our operating expenses, that will drive our revenue and our gross margin faster, we'll certainly take advantage of that opportunity. But in terms of how low can that ratio go, the faster we drive the top line, Sameer, the lower that number is going to go and we know our objective is to make it as low as we can as quickly as our camp.

[Sameer Joshi:]

Understood. And in terms of gross margin, you're targeting upper 50%. You already have two consecutive quarters of 63-plus percent gross margins. Are you expecting some margin pressure in the next few quarters? Or are you just being conservative and careful in terms of guidance?

[Kevin Helash:]

Yes. Thank you, Sameer. It's Kevin again. So we've had a few quarters where we've gone over 60% and we're obviously very happy with that achievement. When we look out through the business that fluctuations operations in the quarters between our products and our geographies. We think that it's going to bounce around in the upper-50s. We may have a quarter where it's a little higher. We may have a quarter where it's a little lower around that 60% range, but when we look out to the entire year, we think the upper-50s is a good spot to target our business set. And Sameer, I remind you that we will have a bit of a headwind on our margins, a slight headwind on our margins as we bring our Michigan plant online until we get it up to full operating capacity. So that's also ways into our thinking as well.

[Sameer Joshi:]

Understood. Yes. Thanks for reminding us of that. One of the things for the year's outlook includes a potential upside from a strategic acquisitions, that we had in the month of May now. So I think that there must be parties that you're talking to fairly advanced. Do you have any thing that you can share with the street in terms of what kind of acquisitions we are looking at that could materialize in the next four or five months?

[Kevin Helash:]

Yes. Thank you, Sameer, Kevin again. So as we've mentioned in previous calls, we believe the market is quite fragmented and there is an excellent opportunity out there for consolidation. I can also say that we are very active in terms of talking to potential partners for us moving forward, and they're in all levels of or stages of discussion. At this point we don't have anything at an advanced enough stage that we would report it, but I can certainly tell you that we're active. We're having some very interesting discussions with a number of different players. We see lots and lots of great opportunities, and I think it's going to be a matter for us of deciding which one do we want to chase when and what sequence, but it's been a fun nine months, I'd say in terms of getting to know the industry better and seeking opportunities for us to accelerate our growth.

[Sameer Joshi:]

Understood. I'll take rest of my questions offline. Thanks a lot.

[Kevin Helash:]

Thanks, Sameer.

[Operator:]

And our next question will come from Ben Klieve of Lake Street Capital.

[Ben Klieve:]

Alright. And thanks for taking me. Hey, Kevin, thanks for taking my questions and congrats on a good quarter, especially on the bottom line here. A few questions, one on the quarter and then a couple of big picture questions. My quarter question is, is I'm trying to understand kind of the seasonality of your row crop business in North America in terms of first and second quarter breakdown. Can you help me understand kind of the percentage of revenue recognition you expect in this market? From the first quarter to the second quarter and how maybe that number has evolved and where you think it's going to go, I just don't understand the seasonality of this business as well as I should?

[Kevin Helash:]

Ben, it's a very good question, and thanks for asking it. So in general – I'll speak in generality and then comment a little bit about how things flow at least the way we see it. So in terms of row crop, we start the season out with our seed treatment business. And that goes on obviously at the very early stage of the cycle. So that can happen for us in Q3 and into Q4 in the Northern hemisphere as we're getting ready for the planting season. And then while that's all going on into Q1, that becomes a big West coast market for us right now, in terms of taking care of the specialty crops, the trees, the fruits and nuts, the vegetables. And then as we move into Q2, then we go back to row crops, Ben, in terms of our foliar and soil applied treatments. So, and then it really – and on top of that it fluctuates depending on our customer's mood in terms of do they want to bring some product in early to stock up? Are they looking to wait a little bit longer? And I'd say, Ben, right now, we're certainly seeing good demand early for our products going into the row crop season, of course we're having excellent prices and the entire industry forecasting, great crop input demand. So it's a bit tricky between Q1 and Q2 Ben, but – and I'd say Q3 and Q4, but that's about how we see it. I'm more than happy to give you more color on that if that didn't answer your question.

[Ben Klieve:]

No, I mean, that, that was helpful. I appreciate there's a lot of variables kind of working against each other at the same time, so that was helpful. There is a couple other big picture questions, you talked about the Latin American row crop opportunity, obviously a huge addressable market for you all. I know you're still in the relatively early stage here, but I'm wondering if you can talk about the contributions that this market had to your revenue in say 2020, and your expectations for that market, this year and next on a percentage basis

[Kevin Helash:]

Yes. Ben thanks. Great question. So I'm going to hand it over to Matti in a second, but I can tell you that we are extremely positive about our potential in that market. We've got a great foundation in terms of our partners, our distribution partners, as Matti mentioned with Rizobacter and others. We've got I'd say a healthy amount of field trials going on. We feel we've got a pipeline that fits to get into the market there not only in the specialty crops where we've had our history, but really getting on the wheat, corn, soybean acres in that market. With that Matti, I'll hand it over to you; this is one of your areas of greatest passion. So I'll hand it over to you to provide Ben with some more commentary on Latin America.

[Matti Tiainen:]

Yes. Thanks Kevin, and thanks Ben for the questions. Matti, here. Yes, and Kevin is right there. So I think Latin American market as a whole is one of my favorite jobs, and there's many reasons. One is that it's of course very big in terms of bag, the results are very professional, and very pragmatic, but as we've worked there already for few years in terms of product development, and we've been working directly with our hopefully future partners, I would say that right now, we're at the breaking point. We're at the break through points, right? So we've have some big partnerships that we've laid out like the Rizobacter one, but we for sure will have some more to come in the very short future. So it's taken some time as it always does. We worked through the demonstrate that both are bio-pesticides and our plant health products are not only competitive, but actually we're talking very competitive and good value for the growers and the whole channel in the market. So – and how we see the markets is that Brazil is a market of its own. And then you've got the rest of LatAm but it definitely is something to look forward from all aspects. And as said, we've been working there now long enough to be confident that we've got all the tools to break through in the very short future, specifically with our row crop production, both in seed treatment and folio.

[Ben Klieve:]

Got it. Got it. That's helpful. Thanks, Matti. One other question for me, and then I'll get back in queue. You talked about the carbon-sequestration of the product. And I'm wondering about kind of a big picture question here. Do you have studies like this across your product portfolio that really show the environmental benefits of the products from carbon-sequestration perspective, such that maybe your customers would have an easier access to the carbon markets as they hopefully emerge here soon.

[Kevin Helash:]

Yes, Ben. Hi, it's Kevin again. So we've spent – you hit on a very active topic in Marrone. We we've spent a lot of time talking about sustainability and of course the impact that our products can have and do have. And so being a science-based and a fact-based company, we wanted to have data, right; because we believe we are contributing positively, but show me the numbers show me the independent assessment. So we went ahead and engaged with Boundless to do the study that reported on extremely happy with the results we got 9.8 out of 10 and very, very pleased with the results in terms of carbon sequestration, greenhouse gas reduction by using our product. And so that's given us the confidence Ben to continue down that path. We think that our 306 product that Matti mentioned is going to score extremely well in that study as well. And as we move forward, that's our intention is to continually provide data to our customers and to the market in terms of what benefits our products have. Not only obviously they have to work right, first and foremost, they have to work, they have to be efficacious, they have to provide a return for the grower, but in our opinion, when we can add to that a fantastic sustainability story, we're really excited about that combination.

[Ben Klieve:]

Got it. That's helpful as well. Okay, I appreciate you're taking my questions. I think that does it for me. I'll get back in queue.

[Kevin Helash:]

Thanks, Ben.

[Operator:]

Our next question will come from Bobby Burleson with Canaccord.

[Bobby Burleson:]

Hi, good afternoon.

[Kevin Helash:]

Hi, Bobby.

[Bobby Burleson:]

Hi. Hi, Kevin. Thanks for taking my questions. So, yes, nice quarter, especially on the profit line. I'm curious just in terms of – as your revenue mix and your product start to shift more and more – or continue to shift more and more to row crops and seed and soil treatments. What kind of the long-term gains and maybe operating expense efficiencies that might be out there? Just fundamentally trying to understand how much more efficient spending in that area versus specialty crops?

[Kevin Helash:]

Great question. So, Bobby, and to be completely blunt, and it's not a secret, we're sub-scale as many of in the industry are. We built a platform here in this company that we can grow into that I'm very fortunate to our investors and to Pam for building this platform. And certainly as we move into row crops, getting on those massive acres in North America, in Europe, in Latin America it allows us to get to scale in terms of our production capacity, in terms of utilizing our people, in terms of all the infrastructure that is around this company. So, as Sameer asked at the beginning, that kind of growth on the top-line will drive down that operating ratio, OpEx ratio, and make this company more profitable. So yes, the more we focus and drive that top-line revenue while maintaining the infrastructure we have, which is right size for the company, is going to certainly go right to the bottom line.

[Bobby Burleson:]

Okay, great. Thank you for that. And then just a follow on to the previous caller's question on that positive result you got from the recent greenhouse gas reduction study. I'm curious what kind of proactive next steps are? I understand that you can move ahead with similar studies on other products, but is there a larger kind of marketing package that you start to put together? Or are there groups that you are more vocally a part of to kind of proactively move your customers in your direction, the industry in your direction? How does that work?

[Kevin Helash:]

Yes, Bobby, we've spent quite a bit of time. It's Kevin again. We've spent quite a bit of time talking about now what. So we have this great result, a fantastic reduction in greenhouse gas by using our product. And so, who do we need to market that story to obviously growers and obviously our distribution channel partners, but who else, right. So should it be the major food companies around the world, industry groups, consumer association. So you asked a great question and the short answer is yes. We will be making a concerted effort to get the message out. And right now our thinking is that net is going to be quite wide in terms of who do we talk with. So we're very fortunate. Keith Pitts is our Chief Sustainability Officer and he is spending the vast majority of his time right now working on this whole sustainability story for us, because we think it's important for a number of reasons, obviously, first and foremost, a good that we do or the benefits we can provide with our products. But I think we want to be or I know we want to be one of the drivers of that – getting that message out in the industry and talking about the features and benefits of ag biologicals in general. So it will be a bigger and bigger part of our work here in Marrone Bio.

[Bobby Burleson:]

Great, great. Maybe a TikTok channel something more gen Z friendly.

[Kevin Helash:]

Exactly. Well, we're lucky. We've got a lot of those folks in the company that are much better at social media than I am Bobby.

[Bobby Burleson:]

Yes. I've got like 10 thumbs. So, well, thanks again for the additional color. Appreciate it.

[Kevin Helash:]

Thanks Bobby.

[Operator:]

And next we'll go to Nathan Weinstein of Aegis Capital.

[Kevin Helash:]

Hi, Nathan.

[Nathan Weinstein:]

Hi, Kevin. Hi, Sue and Matti. Thanks for taking my question. So I still see continued progress in the business and I suppose inflation has been a big topic recently. Just maybe a broad take from you what you're seeing in agricultural industry from your own business or your customers in terms of inflation?

[Kevin Helash:]

Yes, Nathan, that's a great question. I mean, there is no doubt that prices of everything have gone up and there is no shortage of a funny social media posts about – lumber prices to start with. But in our industry, obviously, a higher grain prices is driving higher input costs. But we still think that the economic situation of the grower in general is in very good shape. Prices are fantastic. And so while you're seeing inflation in the input side, I don't think that it's overcome the positive effects of the prices, commodity prices in general. From our side, Nathan, I imagine you're thinking, do we see any effects on our business. At this point, really we're feeling a pretty good tailwind. We think that the high crop prices are going to drive a lot of crop inputs. We're going to see healthy planted acres around the world. We believe that that will serve to MTL to distribution channel this year and set us up really nicely for 2022 at a restock and going to the market in the coming year with strong demands. Certainly, when our grower customers are doing well, I mean, it's well – everybody in the industry does well. So I'd say at this point, while there is inflation across almost everything you can think of, I still think we're in good shape, at least from our perspective we're not feeling any negative impact at this time.

[Nathan Weinstein:]

Oh, great. Good to hear. And then another topic that's been in the news lately as New York legalizing marijuana, and maybe you can speak about your cannabis business, any perspectives on that part of the business.

[Kevin Helash:]

Yes. Nathan, so, as you know, we have a large number of our products that are certified organic and so they fit extremely well into that market at any organic market, including cannabis. And I'd say we think about it as a regular part of our crop portfolio. We think we're – we have a great fit there as we do at any organic product. So – but we don't spend an inordinate amount of time focusing on it. We think about it as the same as any of our other organic crops. And I think that as that market continues to grow, we expect to get our unfair share of that growth.

[Nathan Weinstein:]

Great. Okay, very nice. That's fair. So I just wanted to close actually with a comment. I was going to ask a sustainability question, but a couple of other analysts got to it. And I think that's a positive thing because I think that the sustainability Africa Marrone should be at top of mind and the dialogue around your company. So it's good to hear all the interest on that front.

[Kevin Helash:]

Yes. Thank you, Nathan, and thanks for taking the time to join the call today.

[Operator:]

And with that that does conclude today's question-and-answer session. I'd like to turn the call back to our speakers for any additional or closing comments.

[Kevin Helash:]

Thank you, operator. We appreciate everybody's time today and your interest in MBI. Our strong start to 2021 has given us the confidence to raise our forecast for this year and to a point to a time when we believe we will cross breakeven on an adjusted EBITDA basis. The strength of our commercial offerings globally coupled with a continued focus on cost management will be key to our continued success and our ability to provide greater returns to our shareholders. Thank you and we look forward to speaking with you again soon.

[Operator:]

And with that everyone that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.