Marrone Bio Innovations, Inc.
Q4 2020 Earnings Call Transcript

Published: 23 Mar 2021

[Operator:]

Good day, and welcome to the Marrone Bio Innovations Fourth Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Linda Moore, General Counsel.

[Linda Moore:]

Good afternoon, everyone, and thank you for joining our call. Welcome to the 2020 fourth quarter and full year earnings conference call for Marrone Bio Innovations. On the call today are CEO, Kevin Helash; and CFO, Sue Cheung. If you would please refer to slide two, I would like call 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 who is joining us on the call today. I'm pleased to be accompanied by our new CFO, Sue Cheung. While Sue has only been with us a few weeks, she has already begun to put her positive mark on the organization. We're all looking forward to working with Sue as we continue to expand MBI's position as a pure-play leader in the ag biologicals market. For today's call, I'd like to speak to our full year highlights and outlook and have Sue provide you with a more detailed financial overview. 2020 was a remarkable year for MBI by any standard and I believe we are just starting to hit our stride. Within the agricultural sector, we're in the right place at the right time and are uniquely positioned to take advantage of the robust growth we see in 2021 and beyond. Let me elaborate. If you would turn to slide three, we are now consistently delivering results that raise the bar on our leadership position in ag biologicals even. In the face of continuing constraints from the global pandemic, we demonstrated the value of our portfolio and the resiliency of our business model. We delivered our 10th consecutive quarter of increased revenues with year-over-year growth of increased 31% and a five-year revenue CAGR of 29%. We also delivered our ninth consecutive quarter of gross margins above 50% and a record for any quarter at 63.7%. Gross margins for the full year were 59.6%, a 470 basis point improvement that was primarily a function of a favorable product mix, particularly in sales to the row crops market. We've also challenged ourselves to be a leader when it comes to running an effective and efficient organization. To that end, I am pleased to report that our operating expenses have been lower in each of the last 3 quarters. We ended 2020 with an operating expense ratio of 104%, a dramatic step improvement from 150% for fiscal year 2019. This change is particularly impressive in light of the fact that we held the line on costs even as we fully integrate Pro Farm.

[Sue Cheung:]

Thank you, Kevin. It's been a busy few weeks as I've dived into the business, and working with the team to complete the year-end activities for this earnings announcement and the following of our 10-K. I'm looking forward to spending more time on our future opportunities on how we deliver on our strategic and financial commitments. If you want to turn to Slide 8, the combination of revenue growth, margin expansion and operating expense discipline, as we reduced our net loss for both the fourth quarter and the full year by 58% and 46%, respectively. We increased the revenues by 16% in the fourth quarter and 31% for the full year. Gross profit growth was even stronger than revenue growth. The gross margins increased to 63.7% for the quarter and 59.6% for 2020. As the new CFO, I'll be working with the team to continue to balance funding for growth and cost discipline. As we show on Slide 9, we are controlling R&D and SG&A expenses as we ramp up our revenues and expand our margins. Our operating expenses in 2020 included the one-time benefit of $1.4 million from the PPP loan. If you exclude this benefit, spending still declined 6% year-over-year. Going forward, we have committed to keep operating expenses flat at the 2020 levels price inflation, even as we scale up the top line. On revenue growth, favorable margins and good cost management now through to the bottom line and to our cash position. Cash used in operations was higher in Q4 because of seasonal working capital needs related to the timing of the product shipments at the year-end. For the full year, the use of operating cash was significantly reduced as a result of the improvement in our net loss and a more efficient use of working capital across all quarters. Working capital improvements are a key focus moving forward.

[Operator:]

Thank you. We can now take our first question from Bobby Burleson, Canaccord. Please go ahead.

[Bobby Burleson:]

…questions, and welcome onboard, too.

[Sue Cheung:]

Thank you, Bobby. Nice to talk to you.

[Bobby Burleson:]

So, yes, I guess, for the whole team, 2020 outlook, you guys are being appropriately cautious on the tough weather that you've seen at the start of the year. Curious, ex the unusual weather impact, what kind of growth rate do you think the normalized growth would have looked like in 2021 in the outlook?

[Kevin Helash:]

Hey, Bobby, it's Kevin. We are -- we feel really good about 2021. There's lots of good things in the market. Grain prices are very strong. And, yes, we're dealing with the impacts of COVID on a number of fronts, including supply chain, logistics. But the way we look at it right now, we're projecting revenue growth in the mid-20% range year-over-year. And continuing to drive mid-50% gross margins and holding our OpEx relatively flat year-over-year. So we're pretty optimistic about the year.

[Bobby Burleson:]

Okay, great. And in terms of organic growth versus the industry, obviously, you had a pretty meaningful acquisition, but we're starting to kind of anniversary that stuff. If we look at organic growth for your business, as it is now, versus that mid-teens growth for the industry? Is it sustainable premium growth rate? You’re already bigger than most players, as you showed in that slide. At what point do you this kind of track with industry growth, do you think?

[Kevin Helash:]

That's a good question, Bobby. So as you pointed out, the industry is growing roughly in the mid-teens, and we've been significantly outpacing that for some time. When we look into the opportunities to grow our existing platform around the world, different markets, different crops, combined with the growth rate of the industry, combined with our pipeline, we feel pretty comfortable we're going to continue at this rate and pace for some time.

[Bobby Burleson:]

And is there a feeling that some of these companies are hitting that's just a structural ceiling, where we can expect this to be an ongoing dynamic where we've got a last mile players and a very few independent guides of scale?

[Kevin Helash:]

That's a great question, Bobby. There are a tremendous amount of fantastic companies in our sector, which is great. I mean, I really support that. The more minds and resources that are focused on building out the sector too makes the pie bigger, and we all benefit from that. I don't foresee a slowdown in the innovation in the sector at all. And that's coming from all parts of the business, whether you're talking about the multinational major players all the way down to the startups. What really excites me, though, is we have a platform that we've built over the last 15 years, which will allow us to capitalize on that technology and all that innovation out there and accelerate our growth. And we're going to be very cautious about how we think about that, but I just see opportunity out there moving forward in this sector and for Marrone.

[Bobby Burleson:]

Okay. Thank, Kevin. Thanks, Sue.

[Kevin Helash:]

Thanks, Bobby.

[Sue Cheung:]

Thank you, Bobby.

[Operator:]

And we can now take our next question from Laurence Alexander of Jefferies. Please go ahead.

[Laurence Alexander:]

Good afternoon. Could you give a little bit more detail on trends by region and by row crops versus non-row crops and types of product, just which ones are getting the most traction?

[Kevin Helash:]

Yeah. So we see growth across all the sectors. For us, while we expect all of our platforms to grow, and all of our product categories to grow. We certainly see our seed and slow treatment portfolio growing the fastest. But what we're really excited about is our move into the row crops. We have been traditionally focused on high-end specialty crops, which has done a very well up to now, but our new portfolio that we've developed both within Marrone and the excellent addition from the Pro Farm line of products has really moved us into that broad acre row crop, corn soybean market. And that's opened up a tremendous market opportunity for us. So yeah, I guess in terms of how are we going to grow on every front that we can, we're going to grow geographically. We're going to grow by crop, and we're going to grow by sector within the entire space, all together. But certainly, you opposed to pick one that we see growing fastest for us, it’s certainly the seed and soil treatment category.

[Laurence Alexander:]

Okay. Thanks. And then in terms of – so the R&D pipeline is – are there any kind of significant studies or updates on particular products within that pipeline that we should be aware of?

[Kevin Helash:]

Well, the one piece of good news I'd say coming out of that recently is we launched products ahead of schedule last year. We have at least one more product coming to the market this year. And looking out into our pipeline, we see, let's just say, two to three products per year being launched and then keep in mind that when we launch a product, we typically start with one country or a region, and then we continually expand from there. So it's – there's a new product that comes to the market, but then you keep growing that footprint all around the world. But no, we said in Q3 that we expect roughly $50 million of incremental revenue to come from our pipeline by 2026, that still holds. And upwards of $100 million coming by 2030, and we still feel on track to deliver.

[Laurence Alexander:]

Okay. Thank you.

[Kevin Helash:]

Thank you.

[Operator:]

And we can now take our next question from Sameer Joshi of H.C. Wainwright. Please go ahead.

[Sameer Joshi:]

Good afternoon and thanks for taking my question. Sue, welcome to the team. Looking forward to meet you some time soon.

[Sue Cheung:]

Thank you. Looking forward too.

[Sameer Joshi:]

My first question relates to the – again, just taking into the revenue projections for this year. You already grew around 31% last year. You introduced four products this year. And the projection is for around 25% growth. Are you expecting your tradition – or previous 11 products to have muted growth or like because these four products should start contributing to the top line as well this year. So can you explain us that?

[Kevin Helash:]

Yes, Sameer nice to talk to you again. So if I heard your question right, I think you’re asking are we – are you expecting our base products to continue to grow at the same pace that they have? Is that correct?

[Sameer Joshi:]

Yes. And is it expected to be slower than the new products that you are introducing, given that your year-over-year growth rate is only 25%?

[Kevin Helash:]

Great. Well, I start by saying, I'm pretty happy with 25% year-over-year growth. Certainly, given the broader sector, but when we look at our portfolio that we have today and the opportunity to take that that into Europe, take it into South America, where we're just getting going. We see tremendous opportunity there. And we think that all of our product lines will continue to contribute and grow at at least the same pace as the industry overall, if not higher. And then our product pipeline is really icing on the cake for us, in terms of continuing to add more products. And as they move from adoption to early adoption to – sorry, from early adoption to adoption, we see that ramp up pretty quick as we have previously when we've launched products. So, yes, going out, we certainly do not see any reason why our growth rate is going to slow. And certainly, as we continue to bring products through our pipeline, and we have some very, very interesting new products coming through that pipeline. I see us continuing on the same path that we've been on.

[Sameer Joshi:]

Understood. On the gross margin front, the fourth quarter was very strong, and it was because of product mix. And I'm guessing it was the row products that from the bulk of this sales. So, going forward, if you're going to increase your row product mix, how does the gross margin move from here? For the year, you’re at 60% and you’re guiding for mid-50, so should we -- is that a conservative estimate for this year?

[Kevin Helash:]

Yes. We continue to focus on gross margin. We had a very good year, this last year in 2020. It does move around somewhat depending on the seasonal demand and quarter-by-quarter demand, in terms of which products are moving when. We're very fortunate in the fourth quarter, we had really good sales of our seed treatment line and our Pro Farm full year line, which give us very healthy margins. Going forward, we're going to continue to look to optimize our portfolio. And as Sue mentioned in her remarks, we believe that the investment in our Michigan manufacturing facility will also help to lower our COGS and thereby help to increase our margins going forward. And then I’d say, overall, as where pipeline continues to refine and upgrade our existing products in terms of concentration and efficacy. We see -- we certainly see opportunity going forward to move from mid-50s consistently upwards in the coming years.

[Sameer Joshi:]

Got it. Thanks for that. I will jump back in the queue. Thanks.

[Kevin Helash:]

Thank you, Sameer.

[Operator:]

We can now take our next question from Nathan Weinstein of Aegis Capital. Please go ahead.

[Nathan Weinstein:]

Hi, Kevin and Sue. Thanks so much for taking my question and nice to see the continued progress in the business. So earlier, I think it was in your prepared remarks, you broke down kind of the number of small players in the biologics space that you see around the industry. It's hard for me not to think of that list of company sort of as an opportunity set from Marrone. And maybe you could just give a little color on future M&A and kind of what some of the criteria might be?

[Kevin Helash:]

Yes. Nice speaking with you again. In terms of M&A, I'd go back to saying that our -- the focus of all of us here is to drive the results of the company that we have today. We have lots of opportunity to grow our product line. We've got an excellent portfolio. Lots of international expansion. I'd say we're just hitting our stride, in terms of getting Pro Farm integrated with the MBI lines and all the permutation and combinations there to build new products, which is already in our pipeline. But we do see an opportunity to make some selective acquisitions. There are a number of players out there that we believe would be a fantastic combination with us. So just like everybody else in the industry, I'd say we're thinking about permutations and combinations there. But to be clear, we've got some pretty strict criteria that we've set out for ourselves in terms of they have to add shareholder value in the near-term. They have to be accretive. They have to bring either new technology, new market access, access to new crops and provide us with meaningful synergies. So pretty tough, right, to bring something in and drive the results straight to the bottom line in a short period of time. But we're certainly paying attention to opportunities in that sector or in that area.

[Nathan Weinstein:]

Thanks. Kevin, that's very helpful. And just one follow-up for me. On the ESG theme, it seems like it's always been part of the DNA of Marrone Bio, looking forward to seeing that report come out. But just maybe you could make a comment on the broader industry and if you see increasing awareness from some of the Moody’s in the space regarding ESG?

[Kevin Helash:]

Yeah. Thank you. Well, certainly, you're right. I mean I go all the way back to Pam Marrone vision, right, of this company and why we're here in the first place. And certainly, it has a strong ESG backbone. From our standpoint, it is part of our DNA. It's part of our culture. And we're spending a significant amount of time making sure we are measuring ourselves properly. We're setting industry leading objectives for ourselves. We think we're doing, in fact, we know we're doing lots of great work in the ESG area. But we also know we've got room to improve. So I'm really looking forward to finishing up the work this summer and presenting the findings to all of you later on this year, but it’s an ongoing part of our culture and it will be an ongoing part of our business.

[Nathan Weinstein:]

Thank you Kevin. And then I guess there was another part of that question, which was just, do you see other larger players starting to become more aware of the employees of ESG as well?

[Kevin Helash:]

Yeah. Sorry, you asked that question. Yes, I do. Absolutely. I think it's absolutely table stakes today for any company and for any business, and I include our grower customers now. I mean, it is a business demanded by our customer’s at large, consumers, supply chain, everybody from throughout the entire industry worldwide. Yeah, for sure, it's top of mind, in my opinion, with everybody out there.

[Nathan Weinstein:]

Great. Thanks for taking my question.

[Kevin Helash:]

You're welcome.

[Operator:]

And we can now take our next question from Steven Ralston of Zacks. Please go ahead.

[Steven Ralston:]

Good afternoon and thank you for taking my questions. I'd like to move back to a prior question, and that is to get a little more granular in your changes the business mix, dovetailing the change in the geographic mix versus your increased penetration into row crops. In row crops, it seems self-evident with the Pro Farm acquisition and your agreement with Rizobacter and the new approvals like Pacesetter, but in the geographic, you're expecting the South America to rise from about 6% of your revenues to 20%. And given that your base of your business is growing in the 20% to 30% range and having that additional mix to it, that's at least a 300% increase if not more. Could you talk specifically of what that potential is you see in South America and the agreement with Rizobacter having the two components and one of them being selling your products? And also as a separate question, but in the same tone is what is going to be the driver in the Asia Pacific area is having that area increase from 14% to 23%?

[Kevin Helash:]

Right. So I'll start with Latin America. And for us, the focus in that market is corn soybeans. And so we're building on our experience in Europe that Pro Farm has had to move into that market. Rizobacter is one of our major channel partners down there. But we're working with a number of others as well. And so we're starting in the South, Argentina, Uruguay, Paraguay, Bolivia and then moving our way into Brazil. And we expect – we were hoping to have a little more traction in Brazil this year, but they ran into some pretty tough COVID conditions that delayed us a bit. But the good news is the demand and the excitement and the enthusiasm in Brazil is certainly there and the results we've seen thus far with our products in corn soybean markets in Latin America has been phenomenal. So we're really looking forward to…

[Steven Ralston:]

Did the drought affect that also?

[Kevin Helash:]

Not as much drought as COVID really restricted the ability to get out and do the trials and the demos and the technology transfer with the growers and the distributors. So that would – I would say, it would have it would have been the biggest drag, I'd say, on our – moving faster in that market. So it's unfortunate, but we've got great partners down there. As I said, eager to get going. And as soon as we can, do more face-to-face and more training and trialing, we see we're going to – we believe we're going to take off in that marketplace. In Asia Pacific, I mean, we're talking about a small starting point, right, so that percentage is a bit higher. But I would think, if we're thinking about where we're going to grow, we're certainly going to continue to grow in the United States. We’re moving into Canada. We're expanding in Mexico. We've got an excellent footprint in Europe already. That we continue to launch new Pro Farm products into, as well as introduce our legacy Marrone products. Latin America is an unbelievable opportunity for us, given the size of the market down there and how our products fit. So, yes, it's a lot of activity in a lot of big markets with a lot of opportunity for us.

[Steven Ralston:]

That potential in Latin America, roughly, how much of the demand do you expect to be from that Southern Cone?

[Kevin Helash:]

In terms of revenue?

[Steven Ralston:]

Yes. I mean, are you expecting -- looking at the base business, just looking at Latin America, would you expect that to be at least 50% of your Latin American sales, or are you expecting even more from it?

[Kevin Helash:]

Well, right now, we're expecting in 2020, 6% of our revenue came from Latin America. And we're, I'd say, in the -- we're getting well-established there. And by 2023, we're expecting 20% of our revenue to be come from Latin America. That number could easily be significantly larger depending on the rate of our adoption, but that's what we have pegged right now.

[Steven Ralston:]

Actually, I was getting a little deeper than that. Looking at the Latin American business as a base, like that's 100% and looking at the mix within Latin America. And since you're having this concentration on row crops, well, the bread basket down there in the Southern Cone in Argentina, Uruguay, Paraguay, in the southern part of Brazil, that would seem to be a major driver of the Latin American row crops.

[Kevin Helash:]

Correct. That is correct. And then we also have products coming to also get on the wheat acres, which we see as an opportunity as well, specifically in Argentina. So -- but that is correct. You've hit the nail on the head there.

[Steven Ralston:]

All right. Thank you for taking my question.

[Kevin Helash:]

You’re welcome.

[Operator:]

At this time, this concludes our question-and-answer session. I'd now like to turn the call back to Mr. Kevin Helash for his closing remarks.

[Kevin Helash:]

Yes. Thank you, operator, and thank you again for your time and attention today, everyone. Our 2020 results underscore the turning point we have reached in our evolution as a commercial provider of sustainable biological solutions. With a target for revenue growth in the mid-20% range and an annual gross profit target in the mid to upper 50% range, we have established a commercial base from which the company can accelerate its velocity and cement its leadership position in the space. We intend to build on this platform in 2021, and look forward to sharing our progress with you in the future. Thank you.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.