Bioceres Crop Solutions Corp. (NASDAQ:BIOX) Q1 2023 Earnings Call Transcript

Bioceres Crop Solutions Corp. (NASDAQ:BIOX) Q1 2023 Earnings Call Transcript November 13, 2022

Operator: Good morning, good afternoon, and welcome to the Bioceres Crop Solutions Fiscal First Quarter 2023 Financial Results Conference Call. My name is Adam, and I’ll be your operator today. I would now hand the floor over to Paula Savanti, Head of Investor Relations to begin. So Paula, please go ahead when you are ready.

Paula Savanti: Thank you, and good morning to everybody. Thank you for joining. Presenting today during the call will be Federico Trucco, our Chief Executive Officer; and Enrique Lopez 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 statements. 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 as the recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed circumstances. This conference call is being webcast. The webcast link is available at the Bioceres Crop Solutions Investor Relations website. At this time, I will turn the call over to our CEO, Federico Trucco. Thank you.

Federico Trucco: Thank you, Paula, and thanks, everyone, for joining us today. Good morning. Please turn to Slide 3, so we can start our earnings call. The first quarter of fiscal 2023 has been a fantastic quarter in multiple ways. We have grown revenues by 71% and this is after including Pro Farm historical revenues in the year-over-year comparisons. And this revenue growth has trickled down to profitability with our adjusted EBITDA almost doubling for the quarter and reaching $24.5 million. A record quarterly number that is even more impressive if you consider that we are now fully accounting for Pro Farm, which is initially a negative EBITDA contributor, which we intend to quickly turn around in a positive contributor. On this last point, and as we discussed in our September call, we have finalized the Pro Farm merger on July 1 and we have started the integration process during the reported quarter.

This transaction figure has changed to U.S. dollars as a function of guarantee in our main subsidiary in Argentina, which we believe will help us better reflect the reality of this business in our consolidated financials. Enrique will expand on this in his part of the presentation. We will report on HB4 crop status in a few minutes, HB4 soy planting underway and HB4 wheat harvest to start in the next few weeks. Finally, we would like to use today’s presentation to discuss the long-term agreement we have recently released with Syngenta Seedcare to accelerate the expansion of our investment internationally. Discuss why we did it, what is the expected benefits, what is included and what is not included in the agreement. Before we move to the next slide, to more deeply address each key highlights, we also would like what else?

The completion of our share buyback program. The program was launched back in March of 2020 and we have seen stocks approximately 570,000 shares with an average acquisition price of $8.77 cents. We have new program opportunistically where we observe significant dislocation in the market and intend to continue to restore by refreshing the program for another $5 million on a volume basis. Please, now turn Slide 4. This slide shows the year-over-year growth of trailing comparable revenues for the last six quarters and the growth reported in the current quarter. It is obviously not the same to grow at a 71% rate if you’re coming from a flat year, that when you’re running at a 62% growth rate from the fiscal year immediately before, we’re very proud of this quarter’s performance, and Enrique can further address each in his part of the presentation.

Moving to Slide 5. As we have already discussed, we have completed the merger with Pro Farm and now have an unmatched platform for future growth in biological Ag inputs, positioning our company as a clear leader in sustainable solutions for the agriculture of the future. With the integration of Pro Farm, we now have an existing portfolio €“ or pipeline of products designed to replace or significantly reduce the use of synthetic chemicals in most functions for which they are required in high productivity agriculture. Where we can most immediately achieve this substitution is in the seed care segment of the industry, as we will describe shortly when we discuss the long-term collaboration agreement reach with one of the segment leaders, Syngenta.

Before we do that, let’s review the status of HB4 crops in the next three slides. Severe drought conditions in Argentina may transiently slow down sales in our second quarter, the current quarter. However, and at the same time, the drought is creating a unique opportunity to showcase HB4 technology, with the country-wide wheat crop decline expected to be at the 40% level compared to last year’s harvest. As you know, HB4 crops are drought tolerant, not drought prone. So we expect to lose some fields where the conditions have been too extreme and the crop will not be taken to harvest. We think that 86% of the field will be harvested and provides good indication of the benefit of HB4. We believe also that we have enough inventories to stay on track and meet our fiscal year 2023 goal for wheat crop positioning us to reach the guidance provided for fiscal year 2024.

In the next slide, you can see the significant difference observed for one of our second generation materials when compared to isogenic non-HB4 system line, which is currently a top selling conventional variety in Argentina. We are looking forward to see these differences translate into yield benefits and report this in more detail in our next earnings call. In the next slide we will provide a brief update on HB4 Soy. We’re making good progress with the HB4 Soy breeding and multiplication efforts, with early season plantings well under way and, with two varieties being scaled in Brazil for an upcoming launch with multipliers next season. Importantly, we have onboarded the four new licensees or germplasm providers covering genetics for Argentina, Brazil, the United States and South Africa, where we recently obtained feed and food clearance for both HB4 wheat and soy.

We’re doing this while advancing our historical collaborations. For instance, we expect variety from Grupo Don Mario to become available to multipliers next year in Argentina and the following year in the United States. Let me now move to the next slide to discuss the announced long-term collaboration with Syngenta Seedcare. First, what is seedcare? It is a $4 billion to $5 billion segment in ag-input market in which biologicals are currently at 20% of the segment. With one-third penetration resulting from inoculants. Our product categoory where we have achieved significant success in Argentina and are starting to do so internationally. Biologicals in this segment are expected to reach $1.6 billion by the end of the decade, and we believe it can be a clear winner in capturing that growth.

Turning to the next slide. To do this to be a clear winner, we partnered with a segment leader, Syngenta Seedcare. We have been collaborating with Syngenta Seedcare for 20 years in Argentina have jointly achieved and held the number one position for our inoculants, bio fungicides and Syngenta molecules for a long time. This new collaboration creates the right structure to expand this success internationally, at an accelerated pace. We expect the international revenues generated by our inoculants alone to at least double in the next two years. While Syngenta will now cover working capital needs as well as sales and marketing activities, we have secured minimum profits that average $23 million on a per year basis over the life of the agreement, and this is not including an upfront fee of $50 million in exchange for the different rights granted for the collaboration.

On top of these annual minimum profits, we will receive between 50% and 30% of the incremental profits generated by the collaboration, depending on the geography and the year. The collaboration is not just designed to maximize our commercial reach, but it is also focused on accelerating our R&D efforts, with Syngenta covering 70% of the R&D investments required for early pipeline products and new products that we may opt to develop jointly within this framework. Finally, and turning to the next slide. We have not sold our inoculants business to Syngenta. We have partnered with Syngenta to make this business far more relevant over the next 10 years. The current agreement does not include profile portfolio. It is retaining rights for us to use seed treatment solution in our HB4 farming as a service channel or HB4 program.

And we are also making sudden rights nonexclusive in the United States for the overall top solutions derived from products within the agreements. We want to thank Syngenta Seedcare leadership for their trust and hard work to get to this point and reassure them of our full commitment to the success of this joint endeavor. Enrique, all yours.

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Enrique Lopez Lecube: Thank you, Federico, and thank you to everyone for joining us today. We are delighted to have kicked off a new fiscal year with such a strong performance. The result that we’re reporting today, built on top of outstanding growth achievements throughout the previous six quarters. So I would like to take this opportunity to congratulate and thank our sales and operational teams for doing a fantastic job at getting our technologies and products to market, with relentless execution. I will address the drivers behind our quarterly financial performance in the next few slides as Federico outlined. This was predominantly a very important quarter from a strategy standpoint. We started the fiscal year on a strong note by completing the merger with Pro Farm then continue to make considerable progress on our integration efforts and synergy in the quarter.

Simultaneously we executed an ironclad agreement with Syngenta Seedcare that created value on multiple fronts. It provides a long-term profitable growth path for our inoculants. It broadens the scope of our research and development activities around featuring biologicals by having Syngenta core funds 30% of investment. And it also strengthened our balance sheet by bringing in $50 million in the context of global term loan, in which liquidity has become an increasingly important lever to have a handle. These two milestones put us in a unique strategic position to structurally benefit from the secular growth trend and high profitability profile that biologicals offer. Before I dive further into the quarterly results, I would like to call your attention to a couple of important changes we have introduced.

The most relevant aspect relates to a switch in functional currency of our main Argentine subsidiary, which is addressed on Slide 12. The merger with Pro Farm and the subsequent business integration triggered the need to adopt the U.S. dollar as the functional currency in our main operational subsidiaries in Argentina, starting in the first quarter of this fiscal year. Despite starting our operations mostly in U.S. dollars, this subsidiary has historically used the Argentine peso as a functional currency, and their financial statements were, therefore, subject to IAS 29 accounting adjustments that need distortions in our reported results and forced us to provide compelling metrics to better assess our underlying performance. The merger with Pro Farm has enabled this long-standing shift which now eliminates the need for IAS 29 inflationary adjustments and as a result, comparable to years were no longer represented except in reference to past quarters.

Long term, this change will simplify our financial reporting and provide our shareholders with a much clearer picture of our products. On a high note, to allow a fair comparison of our organic topline growth year-over-year, we have taken the extra step to provide pro forma comparisons for fiscal year 2022 revenues and gross profit. Two metrics that would otherwise benefit from the addition of Pro Farm in our fiscal 2023 results. Pro forma comparable figures reflect the addition of Pro Farm to historical numbers and isolate any IAS 29 distortions from fiscal 2022 figures to favor a cleaner comparison of our results to past performance. Otherwise, as reported results from prior reporting periods, will be used for other line items to the income statement and balance sheet, including adjusted EBITDA.

We recognize there will be a bit of adjustment as we go to the 2023 fiscal year. But again, we believe this change more accurately reflects our revolution as a company. I will turn now to Slide 13, please. Our first quarter is dominated by sales in the Southern hemisphere where the growing season started in earnest. Summer crops planting in Latin America for fiscal year and there will be exceptional job of anticipating locking-in at 71% growth in the first quarter in the face of dry weather, particularly in Argentina. As I mentioned, revenues from Pro Farm are incorporated into our sales results, which gives you a like-for-like comparison of our total business first quarter to first quarter. a 71% increase in revenues has been a strong start and provides us with comfort on the average for the first half of the fiscal year, even as we navigate rough words on what has now been confirmed as a historical drug in Argentina.

Let’s please move to Slide 13 for more detail on the revenue breakout by segment. Compensation was the main contributor to growth in the quarter. We saw continued strong adoption of our microwave fertilizers in an environment of tight and costly fertilizer supplies. The expansion was driven by the winter season and preseason summer sales in Latin America. Inoculant sales also expanded across multiple regions. These gains were somewhat offset by lower sales Pro Farm biostimulants on a comparative basis because of the timing of sales last year. All of the biostimulants for the Pro Farm portfolio are now included into a Crop Nutrition segment. While all the food products that come from the legacy Pro Farms’ biocontrol portfolio have been incorporated into a crop protection segment.

Sales of crop production products increased by 54%, even as whoever face dry weather conditions in key Latin American markets and in the United States. While dry conditions in the Western United States continue to curtail specialty crop sales, U.S. low crop sales of Pro Farm bio protection product. Adjuvant sales in Brazil and Argentina also delivered solid performance with higher B2B sales. Finally, sales of seed treatment packs ahead of planting were higher in both Latin America and South Africa. We anticipate dry conditions will likely come from the planting and growing seasons in Latin America. But on the other hand, we will have the added benefit of total revenues, which we expect to rebound with growth as we move through the fiscal year.

If you turn to Slide 15, revenue growth translated into a 52% increase in gross profit, also led by our crop nutrition segment, which delivered an impressive 85% growth in gross product with a 15% gross margin. Growth in seed treatment packs was also achieved with a healthy 50% gross margin. Overall, gross margins of 40.5% were down roughly 500 basis points from the same period last year because of the mix of products sold in each segment dampening margins across the board. We like our industry experienced higher input and price costs in the first quarter, which also played a role, including pressure on margins of some products that require raw materials involving international logistics, such as . Adjusted EBITDA for the quarter reached a record high $24.5 million, as shown on Slide 16.

The increase in gross profit growth improvement and more than offset higher operating expenses within healthy operational leverage. SG&A increase in the quarter was mainly driven by the addition of Pro Farm operating expenses and by transitory costs related to the integration efforts such as severance and higher than usual trailing expenses. Baseline business operating expenses were also higher than explained by bearing our SG&A costs on higher sales. Even with these additional one-timers, SG&A as a percent of sales after deducting $2.8 million in merger transaction expenses was roughly 23%, in line with the first quarter of last year. Despite what benefiting from the pro forma as far from historical 2022 numbers, the adjusted EBITDA margin remained relatively stable at 19.3% year-over-year.

Slide 17 gives you a slightly different look at what brought the adjusted EBITDA improvement. Its confronting to see that our baseline business was strong enough to absorb the net EBITDA contribution on Pro Farm and still allow us to report an impressive $24.5 million result. It is also important to note that within the first quarter, we made meaningful progress on achieving cost synergies from the merger, which also contributed to minimizing the net impact on EBITDA for Pro Farm’s results. Within the next two quarters, we expect to fully achieve the cost synergies we targeted at the time of the merger and believe that by year-end Pro Farm assets will have turned into positive EBITDA contributors, which should be the basis on which we continue to build sales synergies in the next 12 to 18 months.

Same as mentioned when describing sales, having achieved such an impressive EBITDA we saw in the first quarter gives us great comfort on the outlook of profitability for the first half of our fiscal 2023. If you turn to Slide 18, let me wrap up by covering briefly on balance sheet. Total financial debt increased to $228 million related to the execution of the two financing agreements in connection with the Pro Farm merger. Part of the proceeds were allocated to paying off all existing Pro Farm financial obligations and the remaining were used to reinforce working capital at Pro Farm and our overall cash position. Our net interest ratio remained relatively flat at 2.76x LTM adjusted EBITDA with a healthy balance of cash, term and long-term debt.

Cash equivalents rose to $51.3 million at the end of the quarter, including cash used to fulfill our $5 million share repurchase commitment. Subsequently to the close of the quarter, we received the $50 million upfront payment from Syngenta, which brings our cash position to over $100 million. In completion, we have had an exceptional start to the 2023 fiscal year. And despite severe weather conditions in some key markets, our strong first quarter results and the revenue diversification we gained from Pro Farm make us feel confident about the growth outlook for the full fiscal year and allows us to remain focused on executing our HB4 strategy and making Pro Farm assets, EBITDA contributors before year-end. With that, I would like to turn the call back over to Federico.

Federico Trucco: Thank you, Enrique. I don’t want to take much longer, but I do want to finish with some looking forward remarks for the remainder of fiscal year 2023, if you turn to the next slide. I think we expect to see sustainable double-digit growth in our core business year-over-year. And this is the spike coming out of a terrific fiscal year 2022 and also after the volatility that we might be experiencing due to the weather conditions in Latin America. So we are highly confident on this continued growth trajectory for the company for the fiscal year 2023. Obviously, the Pro Farm integration process is an important aspect for the fiscal year, where we expect to reduce that negative EBITDA contribution from Pro Farm and turn that into a positive number by the end of the year and also take advantage of the R&D capabilities that exist within Pro Farm to make them available not only to other internal customers, but also to external clients so that we can utilize this in full.

We will fully launch HB4 wheat in Argentina. We will have data coming out from the current harvest in the next earnings call and use that to evaluate and promote HB4 technology for the next season. And we continue to scale HB4 soy breeding and multiplication in Argentina and Brazil with inventory levels set in place and the performance achieved to meet the fiscal year 2024, 2025 guidance we have already provided. And to recap on those we expect HB4 wheat to contribute between $15 million to $20 million of EBITDA in the next fiscal year and soy to do that at the $20 million to $25 million level by fiscal year 2025. It is important that during fiscal year 2023, we met the initial KPIs that we set in place for the Syngenta collaboration and scale up our production capacity for biologicals in Argentina and also for adjuvants in Brazil hoping to finish the new facility by the end of the fiscal year and have that fully operational in fiscal year 2024.

So these are some of the sort of expectations for the current fiscal year that we wanted to finish the call with. We can now open up the floor for Q&A.

Q&A Session

Operator: And our first question today comes from Bobby Burleson from Canaccord. Bobby, your line is open. Go ahead.

Bobby Burleson: Yes. Thank you for taking my questions. Not sure exactly what time it is for you guys, but good morning if it’s still morning for you, obviously. So I guess the first one is just if we think about Pro Farm formerly Marrone. They had nice growth. They had pretty healthy gross margins, but they always seem to struggle a little bit with the OpEx €“ and I know you guys are targeting reducing that negative EBITDA drag and then turning that positive. So maybe just walk us through some of the low-hanging fruit there that will help you kind of achieve that objective this fiscal year?

Enrique Lopez Lecube: Hey, Bobby. This is Enrique. Good to have you on call for the first time. So, thanks for taking the opportunity to ask questions. It is still morning for us, so you are right.

Federico Trucco: Not as early as for you Bobby.

Enrique Lopez Lecube: Well, you’re right on your comment. I mean, that’s right on thought. There’s obviously the low hanging fruit that we had identified at the time of the merger and that was mostly related to the sort of the business scheme of the company, and that was what we achieved first. So not having the costs or the cost of two publicly listed companies is something that gave us a quick win at the beginning. There were obviously some restructuring measures that we took that were a bit harder to do. But we already accomplished those as well. So we are probably today about 80% of the cost synergies that we have targeted. What we expect is certainly in the next couple of quarters, we will execute the remaining and that plus growth coming from the sales deals in the next three quarters should allow us to put to Pro Farm as EBITDA positive contribution or the asset coming profile.

Bear in mind that the way that we structure the business and that we announced at the time of the merger, we will no longer be looking at performance single-standing entity. There will be business units and there’s cross-selling there. So at some point, this will begin to be sort of one company. What we wanted to do today is give you some sort of notion of how we’re targeting and tracking those operating expenses synergies. And then on top of that, if we get to year-end and look back on a trailing last 12 months basis, and Pro Farm has become a positive EBITDA entity that should set the basis for us to continue executing on the medium-term synergies that were related to sales. Remember that we targeted between $5 million to $15 million in synergies that take a bit longer to be executed, mostly because it requires some work on the registration front, so ready some of the Pro Farm products in geographies where we have sales muscle takes a bit of a time, but that’s what we’re looking for a strong basis on which then to add those synergies.

Bobby Burleson: Great. Very helpful. And then just €“ maybe just a quick follow-up or a slightly different question, I guess. If we think about all of the supply chain concerns and export issues for grain out of Ukraine, et cetera. Obviously, over the past few years, and it looks like it will continue to be so. South America is becoming a major €“ has become a major export source for the world’s food in certain areas, in particular. And I’m wondering with the GM seed and trade capability you guys have developed with HB4. Is there an increasing acceptance maybe for GM seeds and produce in regions of the world that maybe were resistant to GM, Europe, et cetera. What are your thoughts on that environment and how it’s maybe broadening the scope of your opportunity there for HB4?