Bioceres Crop Solutions Corp. (NASDAQ:BIOX) Q4 2023 Earnings Call Transcript

Bioceres Crop Solutions Corp. (NASDAQ:BIOX) Q4 2023 Earnings Call Transcript September 12, 2023

Operator: Good afternoon. Thank you for attending today’s Bioceres Crop Solutions Fiscal Fourth Quarter and Full-Year 2023 Financial Results Conference Call. My name is Hannah and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host Paula Savanti, Head of Investor Relations. You may go ahead.

Paula Savanti: Thank you. Good afternoon and welcome. Thank you everyone for joining our call. 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 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 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 and the webcast link is available at 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 to everyone that is joining us today in our fourth quarter and full fiscal year 2023 earnings call. Good afternoon, please turn to slide three for a brief overview of the highlights of this call. While fiscal year 2023 was challenging, mostly due to external conditions, it was one during which we proved the resiliency of our organization, adjusting business plans to ensure we continue to outperform. So, what have we accomplished in fiscal ‘23? First, we continue to grow at double-digit rates and as you will see in a minute, this growth comes after a record year in fiscal ’22. Our growth in profitability as measured by our adjusted EBITDA, which grew by 31% over $81 million, was even more impressive when you know that we’re not-longer excluding hedge before inventory ramp-up costs as we did in prior years, and that we are fully integrating ProFarm, a business that was not profitable at the time of our acquisition a year ago.

Revenues in this quarter were flat, compared to last year and 9% lower on a pro forma basis, while the gross profit contribution was kept steady, indicating an expansion in profitability for the products that were sold. An important milestone for the quarter is that the legacy ProFarm part of our business became a bit depositive on an LTM basis for the first time, which is one of the objectives we proposed for the first 12 months. So congratulations are in order to the ProFarm team for their sustained efforts in reaching this goal. On the HB4 Wheat front, we have grown revenues by 28% in the quarter. But what is more important is that we grew our multiplier network by eight-fold, which is critical in two ways. First, in that it allows us to transfer inventory ramp up costs to others and thus achieve a linear working capital model.

And also in that it expands our commercial footprint beyond the Generation HB4 Identity Preserve Program, which is a key step towards meeting our fiscal year ‘24 guidance in this crop. On the HB4 Soy front, and more specifically on the HB4 Soy downstream side, we announced an agreement with Moolec Science, a provider of soy-derived food ingredients, to supply them with approximately 20,000 tons of ESG-linked HB4 beans, something we’ll do jointly with our Generation HP4 farmers, monetizing data and traceability premiums for the first time since starting with this IP program. Finally our agreement with Corteva Seed Applied Technologies for MBI-306 will allow us to at least double the size of our joint business in the European region and further validates our position as a leading provider of biological seed care solutions to top players in our industry.

Before I turn the call over to Enrique for a detailed discussion on our financial performance, please turn to slide four, so that we can put this year’s growth in perspective. It’s certainly not the same to show growth after a down year than to do so after a record year and more so in one in which we had to face a historical drought in our main market. The industry-wide after-party effects of inventory resetting in the United States and Brazil, our second and third largest markets, and the added challenge of integrating and existingly unique business like Marrone Bio Innovations, now ProFarm, which was still pre-profit at the time of the acquisition. So to see these doubling in revenues over the last two years and growing more than 60% in adjusted profitability for the same time period is indeed very impressive and a result that we are very proud of.

Enrique?

Enrique Lopez Lecube: Thank you, Fede. Good afternoon to everyone on the call today. I will dive further into our financial performance for the quarter and the full-year. So let’s start with slide five to take a closer look at revenues. Full-year comparable revenue reached a record at nearly $420 million, which represents a 25% growth with respect to reported Bioceres stand-alone fiscal year ‘22 revenues and a 12% year-over-year increase, if we take pro forma numbers that include ProFarm historical revenues. This strong result was obtained in a year with major weather issues in key markets, namely the drought in Argentina and the flooding in California, which impacted some of our fastest growing product lines, like the micro-beaded fertilizers, for example, or high margin product lines, such as our bio protection portfolio for cash crops in the U.S. These dynamics become very clear when looking at the quarterly contributions to revenue growth.

And let me note here that these contributions are all presented in pro forma terms. Our first quarter was incredibly strong, with our team getting ahead of what already loomed like a very dry summer crops season in South America. Then, growth was interrupted in Q2, as you might remember, which is normally one of our strongest seasonal quarters. The negative contribution of Q2 this year illustrates the magnitude of the drought that hit summer crops in Argentina. This situation expanded into Q3, although the strategic agreement for inoculant business with Syngenta allowed us to more than offset the negative impact from persistent drought in that third quarter. And finally, for the fourth quarter, revenue was just shy of $105 million, practically flat against standalone Bioceres previous you remember and declining 9% year-over-year, compared to the pro forma numbers, which is a $10 million drop that you see there on the slide.

The decrease in the quarter is both due to strong year comparison and also the tail end of the consequences of the drought. We have noted in previous calls that the weather transition from a dry La Niña pattern to a weather El Niño was slower than expected and in fact it wasn’t until well into the month of July, they started raining meaningfully in our cultural regions of Argentina. So I think that we can confidently put that episode behind us now, because El Niño conditions were officially declared this month. The fourth quarter also was marked by the industry headwinds that Federico just alluded to and that were also flagged by some of the larger ag inputs players with the channel destocking affecting sales of crop protection products mainly in the U.S. and in Brazil.

In our case, the destocking situation had somewhat of an impact on crop protection sales, but as we will see in further slides, it was neutral from a profitability perspective as we focused on high margin product sales and moved a bit away from lower margin products. Overall, I think that the external context tested the business in several ways this year and the positive annual performance to some extent reflects the success of the strategy to diversify revenue and profit sources. So let’s now turn to slide six for a closer look at the quarterly and annual revenues by segment. So for the fourth quarter, crop nutrition was the best performing segment with 7% year-over-year increase in revenues, which was mainly driven by high margin biostimulant sales in Europe and also in Brazil.

This is a product line for which we see exciting growth potential in these two markets. Also, although smaller in absolute numbers, we are encouraged to see growth in micro-bead fertilizers having resumed in this fourth quarter. And this is even more important considering that Q4 in fiscal year ‘22 was a record high for this particular product. In seed and integrated products in the quarter, we saw the $15.8 million in HB4 wheat revenues that Federico just alluded to. That is a 28% increase, compared to the prior year. The overall segment revenues were slightly below from the last year as some seed treatment products now fall under the Syngenta agreement. And the compensatory payment we got in the third quarter is on account for all of these migration effects throughout the next 12-months, or I should say throughout the first 12-months of the agreement.

Crop protection finally fully explains the 9% decline in revenues for the quarter, which was mainly driven by slow farmer purchasing in Argentina and the channel-destocking dynamics that I just described. As we will see when we address gross margins, this drop in crop protection revenues was almost neutral for profitability. Finally, for the full fiscal year, crop nutrition was the main contributor to growth, increasing revenues by more than $40 million, mainly explained by inoculants, biostimulants, and to a lesser extent, the slight growth in micro-beaded fertilizers, despite the soft performance we saw in the second and third quarter in these products. Seed and Integrated products also contributed to annual growth with a $5 million increase, explained in full by HB4 sales, and crop protection remained roughly flat, a result that we find comforting in a year that was marked by steep declines in that particular industry segment.

Let’s now turn to slide seven, please, and we will take a look at quarterly and annual gross profit performance. We saw annual gross margin expansion from 40% in fiscal year ‘22 to 44% in fiscal year ‘23 as annual gross profit grew more than sales. Gross profit increased both from the standalone and the pro forma metric for the previous year, reaching almost $185 million for the full-year. The first and the third quarters were the main contributors to gross profit increase and margin expansion for the year, well in line with the top line performance I just described. Similarly, the second quarter followed the decline in sales and decreased contribution to the annual gross profit number. In the Fourth quarter, however, margin expansion driven by sales of higher margin products allowed us to offset the effect of lower sales that I just showed.

In summary, I think that the bumpiness that you can see in our quarterly top line and gross profit lines shows that this was a complex year, but one that we were able to navigate successfully when things are put on an annual perspective. Let’s now go to slide eight, where you will find a more detailed view of gross profit by business segments. Gross profit for the quarter remained flat at almost $40 million. In terms of margins, crop nutrition combined higher sales with high margins, which explains the steep increase in gross profit contribution, which reached $20 million for this fourth quarter. Crop protection margins expanded, offsetting the decline in sales, as I just explained, keeping the gross profit flat for the quarter at $14 million.

And finally, Seed and Integrated products saw a margin contraction, compared to the year-ago quarter, explained by lower high margin pack sales, as I explained out of a migration to Syngenta contract, and also lower margins in Seed, as new multipliers moved almost entirely to second-generation materials, discarding first-generation materials as grain, often as a loss and detriment to the margin for that particular category. For the full-year, crop nutrition was undoubtedly the best performing segment, achieving growth in sales with margins expansions and contributing almost half of the $185 million in total annual gross profit. Same done with revenues, crop protection, gross profit remained flat for the year and Seed and Integrated products annual gross profit mirrored the dynamics for the quarter.

So let’s now please turn to slide nine for a view on the adjusted EBITDA for the quarter, which reached $10.4 million, compared to $11.8 million from last year on a pro forma basis. So despite the relatively flat gross profit performance and an improvement in SG&A expenses, other expenses in the quarter and softer JV results drove a $1.4 million year-over-year EBITDA decline. Let’s please now turn to the next slide to slide 10, where we will take a look at the full-year adjusted EBITDA, which reached $81.1 million like Federico just mentioned, which represents a 31% increase, compared with almost $62 million in baseline business adjusted EBITDA for fiscal year ‘22. So just as a reminder of what this baseline business metric represents, it removes negative profitability related to ProFarm and also to HB4 inventory ramp up costs from the fiscal year ‘22 historical metric, which at the end of the day raises the bar against which we measure this year’s performance.

And that’s how we like to see or to look at the business this particular year. Also worth clarifying or reiterating what Federico mentioned with regards to our fiscal year ‘23 fully accounts for inventory ramp up costs. We consider that, that business is now generating both revenues and profits, and therefore we shouldn’t carve out any more these inventory ramp up costs. When adding ProFarm and the ramp up costs to fiscal year ‘22 adjusted dividend, the basis for comparison decreases to $45 million, which implies the 80% year-over-year increase in EBITDA that you see in the slide. Although we don’t consider this metric to sort of evaluate the underlying performance of the business. We do think it’s important to put into perspective the improvement in inventory ramp up costs, but more importantly, to highlight the positive evolution of ProFarm in terms of moving away from negative profitability.

So we are glad to report that we have achieved our stated goal of getting ProFarm assets to be positive contributors to our consolidated EBITDA 12-months after the merger, which takes us to the next slide. From a qualitative perspective, we have reorganized the commercial teams and made headways in integrating ProFarm’s legacy sales and marketing teams with Rizobacter, building a truly global sales force that is dedicated to biologicals. Similarly, we made progress in integrating Bioceres Legacy R&D platform with capabilities from ProFarm, achieving what we believe is a world-class research and development team fully focused on upgrading our portfolio of commercially available technologies. Now, from an EBITDA perspective, we can say now that our target of $8 million in cost synergies post-merger has been fully achieved.

And also, despite not growing ProFarm’s sales, as we would have liked, out of a margin expansion, we have added more than $2 million in gross profit coming from sales synergies. Just as a reminder, at the time of the merger, we estimated sales synergies to be in the tune of $20 million 36-months post-merger, which implies an additional $12 million in gross profit, of which we have accomplished $2 million in this first year. Although still modest, we believe this is trending in the right direction and hence we are encouraged by that. All of this coupled with a streamlined and efficient R&D platform has allowed us to get to positive data contribution not only for the quarter, but also looking back to the last 12 months. Looking forward, it is all about pursuing top line growth from ProFarm products, and we believe we’ll bring strong operational leverage, and that should show and will show in our profitability.

Finally, let’s please turn to slide 12 to wrap up with some brief remarks on our financial debt and cash position. The total financial debt by year-end stood at almost $245 million. The increase that you see there relates to the execution of the agreements in connection with the merger that were done in the first quarter and also the completion of a $26 million bond offering in the Argentine markets, which was done in the third quarter. Despite the higher absolute net debt levels, our leverage ratio now stands at 2.25 turns versus 2.33 turns a year ago. And most importantly, the average cost of debt decreased from approximately 9% to 7% on an annual basis. To summarize my remarks, I think that although we are glad to see how our business behaved in a year marked by several complexities, the current financial performance still underscores the robustness for a long-term strategy that is supported on a unique portfolio of technologies and diversified commercial approach.

With that, I will turn the call back to Federico. Fede?

Federico Trucco: Thanks, Enrique, and please turn now to slide number 13 for an overview of where we are with HP4 wheat, as it advances through the conventional channel. And I think it is important to know that what we’re seeing here in terms of growth is despite a 35% reduction in wheat acreage observed in HB4 targeted regions during the last three seasons, which resulted from one of the longest drought periods on record now in Argentina. So HB4 wheat sales grew by 28%, as we indicated from $12.2 million last year to $15.8 million in the current quarter. This growth was mostly driven by conventional sales as we decided to keep participation in the generation HB4 identity preserve program steady at 50,000 hectares to limit our working capital exposure to this business.

Also, the full approval in Brazil, now including grain exports and not just flower exports, help us to transition to multipliers and distributors more aggressively, with an eight-fold increase in this number. This transition is allowing us to offload inventory ramp-up costs and expand our commercial footprint, which is a key step towards meeting our fiscal year ‘24 guidance in this crop. Another important consideration is that more than 50% of the area that is currently planted with HB4 wheat is planted with second generation varieties, compared to only 6% last year. And we have concurrently moved to Scale 5 second generation materials, compared to mostly only one material last year. And this increase in the number of varieties is helping us move beyond the Bioceres seed channel to include other seed companies as licensees, further expanding our go-to-market possibilities.

Now turn to slide 14 to look at the HB4 soy fronts, where we continue to make progress in Brazil and are scaling to good performing varieties developed under the TMG collaboration, while we get ready to plan the first 1,000 hectares in the United States with varieties developed under our collaboration with GDM. On the HB4 soy downstream side, we announced an agreement with Moolec Science, as I stated earlier in the presentation. Moolec Science is a provider of soy protein concentrates and isolates. And we will supply this company with approximately 20,000 tons of ESG-linked HB4 soy that has an estimated value of about $12 million at the current premium that has been negotiated with Moolec. Something we’ll do jointly — this is something we’ll do jointly with our Generation HB4 farmers, significantly monetizing data and traceability for the first time since starting with this identity preserve program.

On the regulatory front, now on slide 15, the four production approvals in Brazil and Paraguay allow us to value capture almost 90% of the LATAM wheat hectares, which is a significant improvement to where we were a year ago in this crop. And we have also added additional food and feed markets like the recent approval also in Indonesia for HB4 wheats. And finally, if we turn to the next slide, slide number 16, our agreement with Corteva Seed Applied Technologies or MBI-306 adds on top of our existing agreement for the UBB platform and which Corteva is already commercializing ProFarm biostimulants in this region with a brand, with a Lumidapt brand, which sales have doubled in the last 12-months. As a reminder, MBI-306 is a cutting-edge biological insecticide that can be as effective as conventional insecticides with good feed for row crop agriculture and can be used at rates that are almost 10 times lower than our current bioinsecticidal off-rate, particularly in seed treatments.

This agreement will allow us to at least double the size of our joint business in the European region and further validates our position as a leading provider of biological seed care solutions to players such as Syngenta and Albaugh, among others. Finally, looking ahead, I think we have multiple growth levers to expect for fiscal year ‘24. On one hand, we think that the ProFarm top line growth, expanding the current portfolio of biostimulants and long-chain MBI-306 in the United States and Brazil will help us expand the profitability of that business and build on top of what we have recently reported or just now reported for fiscal year ‘23. Also we look forward for the age before growth not just on the upstream side, but also as we are seeing with the Moolec agreement on the downstream side both contributing to our profitability objectives.

The actual growth in Brazil with the inauguration of a new facility that has installed capacity to increase multiple times what we currently manufacture in country. And also return from a historically very severe drought condition in Argentina, so we expect to resume growth in major categories such as micro-beaded fertilizers in this geography. We expect to do all of these to continue to deliver the type of growth you’ve been seeing over the last few years, and also expand on partnerships with industry leaders, such as Syngenta and Corteva, which we have recently announced. So with that, I think we can open up the call for Q&A. Operator?

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Q&A Session

Operator: Certainly. [Operator Instructions] Our first question is from the line of Ben Klieve with Wake Street Capital Market. You may proceed.

Ben Klieve: All right. Thanks for taking my questions. I’d like to start with a couple related to HB4 wheat. First of all, you talked about, kind of, limiting HB4 wheat growth this year as a means of preserving working capital. Can you first of all talk about the thought process behind this decision and then also talk about how many — perhaps how many hectares of HB4 wheat were maybe not realizing the period, because of the strategy?

Federico Trucco: Hi Ben, it’s nice to have you in the call. So this is Federico. Basically the main reason behind shifting towards the conventional channel has to do with avoiding the working capital that is associated with owning all of the productivity under the identity preserve approach. Remember under that approach, farmers or service providers and engage with us to do production of ESG linked HB4 wheat. So that is something we can do up to a certain point. And after that, it becomes demanding from a working capital perspective, also from a grain logistics perspective and so on. So that is something we are monitoring and if we’re able to establish the type of agreements like the one which recently announced the soy with Moolec Science, there is an opportunity to sort of grow on that type of business model.

So the main reason is basically because of that. And then originally we were planning maybe to do twice the number of hectares we’re currently doing on HB4 wheat and their identity preserved. And that’s what we’re transitioning to the multiplier network where farmers buy certified seed. We don’t own the underlining grain. They will own the underlining grain. But this is something we can only do today after we removed the commercial concerns that existed prior to the full approval in Brazil. Remember, we initially got flower approval, but not grain approval, and a significant part of the trade between Argentina and Brazil is grain trade. So the approval in Brazil, the availability of second generation varieties also help us transition from this high working capital model to one that is linear and more standard in the industry.

I don’t know Enrique, if you want to add anything to that.

Enrique Lopez Lecube: No, I fully agree. Hi Ben to be talking to you. I think to sort of reiterate something that Federico mentioned on the call is the fact that this doesn’t affect the level of inventory. So we will need for what we want to plant or what we want others to plant next year. So this is about making the capital structure for the business more efficient without jeopardizing future growth.

Ben Klieve: Okay, that’s helpful. So that kind of then gets into my second question on this around future growth. So you had targeted $15 million to $20 million of EBITDA contribution from HB4 wheat by fiscal ‘24. Revenue in fiscal ‘23 of $16 million, that’s just a pretty dramatic increase here from ‘23 to ‘24. And I understand the multiplier network expansion gives you confidence, but I’d really just like to hear a little bit more about why you think, still think that you can get from where you were in fiscal ‘23 to where you expect to be in ‘24, you know, given that the kind of slower progression, you know, than maybe it was expected last year.

Federico Trucco: Got it. Look, I understand the concern, I think the key here is basically to understand how that number is going to be generated. So initially we had an identity preserved program where we were pushing these ourselves. And at the end of the day, buying all of the grain ourselves. We — in the current year, transition into this more conventional process where we have multipliers doing the scaling up themselves and then realizing sales in which we collect the royalty. So at the end of the day, I think the capillarity that we can achieve with a multiplier network and the fact that the inventory ramp-up process is not on our shoulders exclusively is what gives us the greater comfort on achieving the stated guidance of $15 million to $20 million of EBITDA for the current fiscal year.