Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

S&W Seed Company (NASDAQ:SANW)

F4Q 2013 Earnings Conference Call

September 23, 2013; 04:30 p.m. ET

Executives

Mark Grewal - President & Chief Executive Officer

Matthew Szot - Chief Financial Officer

Mark Harvey - Vice Chairman of the Board of Directors

Dennis Jury - Chief Operating Officer

Robert Blum - Lytham Partners, Investor Relations

Analysts

Brett Wong - Piper Jaffray

Andrew O'Connor - BMO Harris Investment

Matt Koranda - Roth Capital Partners

Ian Gilson - Zacks Investment Research

Keith Gil - JHS Capital Advisors

Rich Hens - Private Investor

Operator

Good afternoon and welcome to the S&W Seed Company, fourth quarter of fiscal year 2013 results conference call. All participants will be in listen-only mode. (Operator Instructions).

I would now like to turn the conference over to Mr. Robert Blum of Lytham Partners. Please go ahead sir.

Robert Blum

Thank you, Denise, and thank you for joining us to review the financial results of S&W Seed Company for the fourth quarter and fiscal year 2013, which ended June 30, 2013. As the conference call operator indicated, my name is Robert Blum. I am with Lytham Partners. We are the Investor Relations consulting firm for S&W.

With us on the call representing the company today are Mark Grewal, President and Chief Executive Officer; Matthew Szot, Chief Financial Officer; Mark Harvey, Vice Chairman of the Board of Directors and formerly a Director of Seed Genetics International; and Dennis Jury, Chief Operating Officer of S&W Seed Company and also a former Director of Seed Genetics International.

At the conclusion of today’s prepared remarks we will open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the release, you could retrieve it of numerous financial websites

Before we begin with prepared remarks, we submit for the record the following statements. Statements made by the management team of S&W Seed Company during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and such forward-looking statements are made pursuant to Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected.

Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company’s 10-K for the fiscal year ended June 30, 2012, and other filings made by the company with the Securities and Exchange Commission.

With that said, let me turn the call over to Mark Grewal, Chief Executive Officer for S&W Seed Company. Mark.

Mark Grewal

Thank you Robert, and good afternoon to all of you. As always, we thank you for taking the time to participate on today’s call and we appreciate your continued interest in S&W. Just really a quick mention, Courtney Grewal (ph), Happy Birthday, it’s her 18th birthday and I’m very proud of her.

As I mentioned in the press release, fiscal 2013 was an incredibly transformative year for S&W that allows us to capitalize on the emerging dynamics of the alfalfa seed industry like never before. We completed two key acquisitions, Seed Genetics International or SGI based in Adelaide, Australia; Imperial Valley Seeds or IVS based in the Imperial Valley of California.

These two acquisitions positioned us to be the world’s largest supplier of non-dormant alfalfa seed. Most importantly, these acquisitions provide us with a number of very critical strategic advantages that we previously did not have access to, including access to large established and seasoned alfalfa seed grower bases, a geographically diversified year around product cycle through Australian based production and expanded sales channels that extends our reach and strength to several key markets, including Asia; the ability to further isolate areas for non-biotech and biotech seed production; access to a breeding program that bring some of the best minds in the world together, to develop products capable of expanding our addressable market opportunities, and importantly, has brought together a group of seeds men with years of alfalfa seed experience and the drive to take the advantage of a changing alfalfa seed industry to the next level.

All of these advantages allow us the opportunity to bring growth and efficiencies to all aspects of our operations, as well as provide a degree of risk mitigation.

I will dive into each of these opportunities in more detail momentarily. However, at this time, I would like to turn the call over to Mark Harvey. With this being the first completed quarter with SGI consolidated with S&W, I thought it will be valuable to have both Mark Harvey and Dennis Jury available to provide insights into the Australian alfalfa seed market and their overview of the alfalfa seed industry in general.

As many of you know, Mark was one of our core-managing partners with Seed Genetics International and is now Vice Chairman of the Board of S&W. Mark has worked in the alfalfa seed industry for more than 30 years and is one of the real innovative bakers in this space. I couldn’t be more pleased to be working directly with Mark, to help take S&W to the next level of its development.

With that said, let me turn the call over to Mark Harvey. Mark.

Mark Harvey

Thank you, Mark. Good afternoon ladies and gentlemen. I’m pleased to be teamed up with Mark Grewal and the tremendous team here at S&W Seed Company.

When SGI, I think first contemplated the opportunity that a combined S&W and SGI could create, it was very easy to see the many benefits that working together would bring.

SGI has developed a very strong base of dedicated alfalfa seed growers, across the key seed production regions of the country in Southern Australia. Our average contract with our growers is approximately seven to 10 years for the field bought, which is about approximately three to five years in California.

We have approximately 22,000 acres of irrigated land under long-term SGI contracts and another 12,000 acres of non-irrigated land that is also contracted.

Overall SGI currently has contracts with approximately 60% of the non-dormant alfalfa seed growth in Australia. While SGI has developed very strong varieties, the S&W varieties are well known throughout the world of leading varieties with their most confided by alfalfa hay farmers.

The ability over time to expand the production capabilities of the leading S&W varieties, through the Australian based production system, is a unique opportunity that benefits our grower base, the company and farmers of the world.

The non-dormant alfalfa seed industry is truly evolving. As populations in the country that are served by non-dormant varieties continues to improve and as they desire, that have a westernized diet based on high protein foods such as milk and beef continues to expand, the need for alfalfa continues to grow to supply the food for these animals that produce those foods.

What becomes equally important across the world right now and this really applies to all the aspects of agriculture, is the ability to produce more from less land. Farmers are going to have to produce more food from marginal and saline soils. Therefore the ability to increase yield for a farmed acre is paramount. This is where the combined S&W and SGI has a real opportunity to play a major role in the future of the alfalfa seed and the fodder industry.

We have a great opportunity ahead of us and I look forward to being a part of it as a member of the Board of Directors and assisting the S&W team.

Mark Grewal

Thank you, Mark. I couldn’t be more pleased to have Mark Harvey of the Board. His presence is instrumental in our efforts to drive increased value for S&W Seed Company and our shareholders going forward.

Both of us will be on the road next week, and in fact well even Robert Blum and Mark and I are leaving this afternoon to New York and Chicago. So we look forward to speaking with those people in those areas this coming week to discuss this historic moment for us as we move forward.

As I mentioned at the onset, we have the capability to take advantage of a number of opportunities available to us in the alfalfa seed industry. The global food supply is one of the greatest challenges facing the world today, driving these challenges as the world population is projected to increase from 7 billion people today to more than 9 billion people by 2015.

With 95% of that growth expected to come from developing countries, it is estimated that we will need to increase food production by between 60% and a 100% by 2015 to meet a roughly 30% increase in the overall population.

All agriculture production starts with the seed, and S&W is uniquely positioned due to the hard work and dedication over the last 30 years of having developed the highest yielding, most salt tolerant, non-dormant alfalfa seed varieties in the world. With our access to land in the Imperial Valley, as well as Southern Australia, we look forward to being a key contributor in addressing the challenges that face us today and into the future.

Now let me turn the call over to Matt Szot, our Chief Financial Officer, for a review of the quarter and year and then I’ll ask Dennis Jury to provide some additional insights into the Australian market place and finally I will provide an overview on a few of our key strategic initiatives. Matt.

Matt Szot

Thanks Mark. Since everyone should have access to the statement of operations, balance sheet and cash flows in the press release, I’m going to provide some additional details in a few areas.

For the fourth quarter revenues totaled a record $12.7 million, compared to $800,000 a year ago. Of the $12.7 million in revenues, approximately $10.4 million came from the company’s Australian based operations and represented approximately 82% of total fourth quarter revenues. The company’s IVS operations contributed $1.9 million with the remainder attributable to S&W varieties.

We made strong progress in our continued initiatives to improve gross margins. Total gross margins in the fourth quarter were 20.4% excluding stevia. This compared favorably to the first nine-months in the fiscal year, where gross margins excluding stevia were 13.5%.

We expect to see continued improvements in gross margins by selling region in fiscal year 2014. As we look to the ’14 year, gross margins from our core S&W varieties and our proprietary SGI varieties are expected to be in the low 20% range. Our gross margins from our IVS related varieties will likely be in the low teens.

Consolidated gross margins will likely vary quarter-to-quarter based on revenue mix, however we expect to see continued improvement compared to last year. Likewise, we expect to see reductions in the SGA line items as a percentage of revenue, as we continue to integrate all businesses. Our go-forward SGA quarterly spend will be closer to $1.7 million to $1.8 million per quarter.

From an EBITDA perspective we saw improvements from 2012 to 2013. Full year adjusted EBITDA totaled $1.2 million, an improvement of 14% from the prior year and adjusted EBITDA for Q4 improved to $1.5 million from Q4 of last year and a $1.4 million improvement from Q3 of the current year.

As Mark Grewal mentioned, we’ve completed the harvest of our fields in Imperial Valley and San Joaquin Valley, but are still in the process of cleaning the seed. We are maintaining our alfalfa seed production and sourcing estimates of 18 million to 19 million pounds for the calendar year 2013-harvest cycle, which is up significantly from the prior year production of 2.8 million pounds.

Production of our proprietary SGI varieties continues to come in stronger than I expected, offsetting lower production contribution from S&W varieties. Of the 18 million to 19 million pounds, approximately 70% to 75% will be proprietary varieties from SGI and S&W and 25% to 30% will be public and non-certified varieties that have historically been a portion of the IVS business model.

Our balance sheet continues to be strong. We ended the quarter with $11.8 million in cash and $21.5 million in networking capital. Overall, we had total est. in excess of $85 million, including $26 million in inventories.

The only long-term debt in our balance sheet at the end of June was $5.4 million, which pertains to a long-term mortgage in the farmland we acquired in July 2012 and promissory notes to the selling shareholders of IVS and SGI. We are pleased with the progress that’s been made over the last quarter and we are optimistic that we feel to continue to driver top-line and bottom line growth.

I’ll now turn the call back over to Mark Grewal.

Mark Grewal

Thank you, Matt. Now I will turn the call over to Dennis Jury. Dennis is S&W’s Chief Operating Officer and General Manager of our Australian Operations. I would like Dennis to provide an overview of the Australian markets and the key drivers going forward. Dennis.

Dennis Jury

Thanks Mark. I’d like to echo Mark Harvey’s comments from earlier. We are excited about the opportunities that combined S&W and SGI brings to the market place and look forward to much success in the coming years.

The Australian market has historically been defined by quality alfalfa seeds being produced in an area that has a low cost of production relative to California. As a result, the seed grown in Australia has had a price point that is at a discount to Californian production.

However due to the quality of seeds being produced, the changes that have taken place within the alfalfa seed industry and our ability to convert over time portions of our grower base to the elite S&W varieties, the discounting that takes place should always disappear. This is where we see tremendous opportunities for a combined S&W and SGI going forward, as both Mark Grewal and Mark Harvey had mentioned.

One of the key advantages of Australian based production is that our harvest time occurs in March and April. This allows us to be first to market in the Middle East and other growing regions that are looking to plant in their fields over the summer.

Additionally, we are ideally located to be a key gateway to the Asian market, including China and India. According the USDA the Middle East with a relatively fast growing population and Asia with high-income growth grates, are both projected to be strong growing markets for beef and dairy consumption. Together these two regions are expected to account for approximately 22% of the increase in world beef trade through to 2021. We are making strong inroads into these markets and believe that these two areas will be key drivers of growth for S&W in the coming years.

Working together the strength of S&W and SGI can be magnified. In Australia we have a large and established group of tremendous growers, early mover advantage due to a harvest schedule and a geographic advantage to some of the key growth areas of the next several years. We look forward to the future with great excitement.

With that said, I’d like to turn the call back over to Mark Grewal.

Mark Grewal

Thank you, Dennis. I want to touch on a few strategic initiatives that we’re working diligently on to drive value for our shareholders going forward. With 33 years S&W had presented some of the world’s leading non-dormant alfalfa seed genetics and as I mentioned earlier, what we didn’t have was the production capabilities to expand our seed.

In 2012 we produced 2.8 million pounds of seed. This year due to the acquisition of SGI and IVS, we expect to have access to approximately 18 million to 19 million pounds of seed, getting excited there.

Of this 18 million to 19 million pounds, approximately 15% is S&W varieties. Our plan is to continue to convert production into more of our elite proprietary varieties. While this process will take a few years of field rotations to occur, in our near term opportunities we are working on to provide the superior products to the marketplace.

We are currently working on unique optimization of our group’s seed stock to leverage lower cost, our production from Australia, with higher pricing with S&W’s elite proprietary varieties. This optimization should allow for continuous improvements in our gross margins, both in the near term, as well as the long term.

One key to remember in any agricultural company is the importance to be geographically diversified for any number of reasons, whether it is for weather, political resource availability or other factors. The ability to expand into the Imperial Valley and Australia provides us with reliability that other alfalfa seed companies simply don’t have and importantly provides a reduction in risks.

It is important to point out that just within the last few weeks, there have been storms that have hit the Imperial Valley. According to reports, it is believed that approximately 20% of the expected harvest in Imperial Valley has suffered damage. Also there have been infestations of (inaudible) that affect both Valley’s. S&W’s ability to have strong inventories already in the bank from Australia is putting us in a very strong strategic position.

Another benefit of the diversification is the capability to better isolate biotech and non-biotech growing regions. As many of you are aware, the counties of the San Joaquin Valley have allowed for the growing of biotech or GMO alfalfa seed and conversely Imperial County located in the far South of California, as well as Southern Australia have not allowed for the production of biotech alfalfa seed.

With our licensing agreements in place with the Monsanto and Forage Genetics to developed two of our leading S&W varieties with Roundup Ready. Our ability to have access to multiple growing regions provides us with unique advantages over the competition.

Our ability to supply to certain countries of the world that permit GMO alfalfa with S&W’s leading non-dormant salt tolerant varieties may provide us with an opportunity to capture an ever increasing share of the overall market opportunity.

One of the keys to our growth going forward is our ability to expand our addressable market beyond the traditional non-dormant alfalfa seed market. We touched on our licensing agreements with Monsanto and FGI to develop biotech non-dormant varieties, but we are also making stronger roads to the dormant marketplaces well.

We recently committed our first seed production of dormant varieties of Manitoba, Canada. The dormant out processes market is roughly equal in size of that of the non-dormant market. So while we are very early in the process, we are beginning to make progress.

Also we are making strides in developing the world’s first alfalfa seed variety bread specifically for the tropical growing regions - thank you SGI. Although alfalfa has for centuries been a stable of Forage production in both warm and cold geographical areas that are considered non-tropical, tropical areas have historically not had local production of alfalfa, due to the trades and limitations of the currently available varieties.

But the creation of large dairies in tropical regions, such as the ones recently built in Vietnam, where they have to ship alfalfa from other areas, we see this as a key opportunity for S&W going forward to expand our addressable market.

It is important to note that as we run through the fiscal year 2014, we expect the distribution of revenues to look quite different than what they were during the fiscal year 2013. We continue to see an environment of rise in seed pricing and due to the depth of our worldwide operations, which includes year around production, we are no longer in position of having to sell inventory – selling through our inventory levels early in the year. They should have a significant built to S&W.

Looking forward we expect to see our revenues to be much more evenly distributed in fiscal year 2014 during the first, second and fourth quarters. The third quarter will continue to be a contributor of revenues, but not to the extent that we expect from the other quarters to be. Our ability to better time order shipments, especially in the environment of the pricing that we currently see should have a positive effect on our gross margins.

Fiscal 2013 was a strong building year for S&W. We see fiscal 2014 and beyond as the opportunity to take advantage of the many of our key beneficial drivers in the alfalfa seed market like never before.

We remain diligent in executing on our strategic initiatives, which include successfully integrating and maximizing the S&W IVS and SGI businesses, to optimize the many synergies that exist between us, resulting in improved margins. This allows us to leverage the operations work for both organizations and create diversification, increasing our reliability and reducing risk. We will continue to ramp up alfalfa seed production, whether it be domestically or internationally, to meet the strong demands that are in the market place.

We’ll continue to invest in the research and development to keep S&W as a leader, providing its high quality alfalfa seed varieties to the non-dormant market. We also want to look to expand addressable market opportunities by introducing non-dormant biotech alfalfa seed varieties, dormant alfalfa seed varieties, as well as new market areas such as our tropical alfalfa seed varieties. And finally, we will continue to stay focused on pursuing other opportunities in the agricultural market that will fit into our expanded platform.

We are very confident in our abilities to continue the executing upon these initiatives, with the goal of positioning S&W to be a leader in the alfalfa seed industry for years to come. As always, we appreciate your support and remain dedicated to continuing to repaying your support many times over.

With that said, lets open up the call for your questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question will come from Brett Wong of Piper Jaffray. Please go ahead.

Mark Grewal

Hello Brett.

Brett Wong - Piper Jaffray

Hey gentlemen, thanks for taking my questions. First, I was hoping that you can talk to the seed pricing in the quarter and pricing expectation through the remainder of the year and as you do that, if possible, can you talk about S&W proprietary variety pricing versus public variety pricing.

Mark Grewal

You want to start Dennis or do you want me to go ahead, okay. And then Matt, if you need to chime in or Harvey just chime in.

The elite S&W proprietary varieties are selling anywhere currently at the 430 to 450 plus range. So we see really strong pricing for those and one of the reasons that that pricing continues to remain strong is that we just don’t add in our seed. So we will continue to ramp that up.

I’m going to let Harvey tell you about the SGI Australian base, but the real goal in this Brett, is to optimize our projected capabilities in Australia with that and create branding that’s going to be specific countries and we’re going through the registration process of those new developed varieties that are going to be an optimization of these entities between the two areas. So you’re going to tell about your base pricing in Australia.

Mark Harvey

Yes, well thanks Matt. Brett, its Dennis Jury here. The base price that we typically sell in Australia and produce these for is around the 230 – sorry 320. It’s very large. We still use this dollar per kilogram, not per pound, so in this are the lower three per pound and we get it grown for around the 220 mark, which as we talked about earlier has been an issue and because of the lower cost of production in Australia, the Australian profit tends to go out at much lower levels. And what we see in an opportunity going forward is combining the genetics of S&W and the higher pricing that that can bring, with a lower cost of production in Australia through straight production and also through blending between the two areas.

Mark Grewal

Did we miss anything Brett?

Brett Wong - Piper Jaffray

Well, no, great. Thanks for the color. I guess one small follow up on that is where is cuts pricing at right now?

Mark Grewal

Over four. The cut market is quite possibly and this is just my personal view, is cuts with the storms, because most of it is actually produced down in Imperial; they really got hit. All of your public and your DNS, what we call DNS in your non-cert seed were some of the last that was going to be harvested and so there won’t be as much in-supply available and its going to put even more pressure on it.

So when you see a high public pricing, that bodes well for proprietary. The proprietary lead varieties, even some of the super varieties now coming out from SGI are going to be in demand at higher pricing levels.

Brett Wong - Piper Jaffray

Okay, great. Thanks Mark. And can you give us any color on volume expectations for SGI, IVS, S&W proprietary for the first and second fiscal quarter?

Mark Grewal

Well, I can’t – okay, you got to recognize that we’ve had a late harvest. So a lot of seed that we would have personally projected coming in the first quarter quite frankly and they said were only about 40% cleaned at the middle, Brett. So we got to look and see where that’s going to lead us.

But also once the storms hit, they are going to pit the clamp down on a pipeline in California that virtually had not seed in to begin with. So we’re really going to have to look at our stock capabilities and thank goodness that we have the SGI in the fold because of their production.

It puts us in a very unique position to brand and optimize some specific products and so we’re going through the process of actually registrating a variety of names that are going to go in different countries and that takes a few months. So we’ll have to look at the timing of those and it may be better at some point to talk to our CFO about what he possibly did decide on what happens there.

Brett Wong - Piper Jaffray

Okay, and are you going to release your statement when these registrations are accrued?

Mark Grewal

We most certainly could and I don’t think we’d have any problems going through some of those names. The marketing departments doing a really good job creating some really unique branding that some of our customers are really looking forward to having. I got to tell you, this is so much around the (inaudible), SGI. Mark Harvey might mention if you don’t mind, just what type of sales we had going into the Middle East.

Mark Harvey

I was thinking about 3,200 tons, which is (Cross Talk) – trying to take metric to pounds, about 4 million pounds, which is probably the largest sales that Seed Genetics have had historically.

Mark Grewal

We’re looking for a very strong year and that’s why we continue to look to increasing production, but I hope that kind of puts you in to what we think about this industry.

Brett Wong - Piper Jaffray

Yes, no, that helps a lot guys. Thanks a lot and I’ll hop back in line.

Operator

Our next question will come from Andrew O'Connor of BMO Harris Investment. Please go ahead.

Andrew O'Connor - BMO Harris Investment

Good afternoon. Congratulations on your progress guys.

Mark Grewal

Thank you very much Andy.

Andrew O'Connor - BMO Harris Investment

I wanted to know – Matt, I thought I heard you suggest gross margins looking ahead and I wanted to make sure I got that right. Low-20’s for our hybrid or proprietary varieties and then low teens for non-proprietary seed, is that right?

Matthew Szot

That’s correct. And then Andy, I don’t know if you caught it, but I did try to clarify that. Of that 18 million to 19 million pounds of production we’re sourcing, about 70% of that is going to be proprietary varieties, in that low 20% sort of margin profile range and that remaining 25% to 30% will be the more public variety or non-certified range.

Andrew O'Connor - BMO Harris Investment

Okay. And then in terms of the gross margin improvement your anticipating, would that come more from the top line revenue growth or from cost reductions. Is it possible to say how much from each side? Thanks again.

Matthew Szot

We’re seeing opportunities for margin expansion from all regions or aspects of our business.

Andrew O'Connor - BMO Harris Investment

Okay and the gross margin improvement, is this more from revenue growth or from cost reductions?

Mark Grewal

Well, let me – if I can just chime in a second for Mr. Szot. Andy, as we shift more into Southern Australia, we’re definitely going to have a very strategic cost advantage over others in productions areas. That’s going to drive our bottom line cost down and at the same time we believe with the optimization program, on creating these brand names with the varieties, we will also drive high in the ASP also. So we really are getting excited about where we think we can go with the margin profile, which we’ll go to where you want to see, the bottom line numbers.

Andrew O'Connor - BMO Harris Investment

Thanks very much.

Mark Grewal

Thank you very much.

Operator

Our next question will come from Philip Shen of Roth Capital. Please go ahead.

Mark Grewal

Hey Phil?

Matt Koranda - Roth Capital Partners

Hey guys. This is Matt on for Phil. Thanks for taking our questions.

Mark Grewal

Hi Matt.

Matt Koranda - Roth Capital Partners

Just a quick one on the dormant side of things here. Given the recent announcement you guys had in July, that you planned your first dormant alfalfa acreage, I kind of have a three-part question, so I’ll just go through these three.

Is this acreage with contract growers or did S&W lease the land itself? Can you provide us with an estimate for how much this product line could contribute to revenue in FY’14? And then how can we think about sales channels for this variety? Can you use your existing distributors or are you guys going to have to go out and develop some new channels for these varieties?

Mark Grewal

A lot of questions there; which one you want to start with? Well, first of all the acreage is contracted. Its not personal inside farmed acres. So first one was up there and its contracted.

Secondly, that existing amount would not be very big, but we’ve already planted many trials in China and we have the ability for immediate ramp up and we have the seed available for that ramp up.

One of the strategic decisions that we’ll have to make as a group is do we want to move into, for example the state of Washington, as well as Canada to enhance that ramp-up and so we’ll be looking at some of those key initiatives and then that would actually encompass the methodology of how we are going to distribute, sell and move into different markets with it. You know us quite well and you know that we are going to be looking at ways that we can ramp this thing us pretty quick.

Dennis Jury

Nat, its Dennis Jury here again. Some of our historic HR clients, I mean we are not bad in the mid to non-dormant and a number of those, of our key clients have got very good links to throw into areas that would only be able to take dormant varieties. So that’s something we can really look at in the future, particularly in Eastern Europe and through the Spain countries and then to the southern, some of the former USSR countries like Ukraine for example. We see some real opportunities there going forward.

Matt Koranda - Roth Capital Partners

Great, that’s helpful guys, thank you. And one more if I may on China. Can you guys just provide us an update on your efforts there? How far into trails are you guys and can you update us on the efforts to establish distribution channels in China as well.

Mark Grewal

Well first of all lets go up the last part. What Dennis just stated, which was very, very exceptional is that they are the gateway to China for us and it’s a big part of having the connection into Australia for that and I see Australia actually as a very parched food resource and a lot of crops for the years ahead, but they are going to go into China, they are going to be a very critical geographic location.

China has a lot of internal issues as far as soil issues, heavy metals, water problems and so these other areas are going to offset that and that’s why the hey operations in California and other areas have been so dynamic and expanding, because China’s in their shipping, you know buying hey from the states and they are shipping it all the way to China and this is driving the price of hey upward, which is then going to correlate the seed pricing.

Now our Vice President of Genetics and Plant Breeding late on this year, we’ll try to get him to you with the press release, which he believes he will have some possible data available later in the year, but we don’t have that yet.

But we do have five dormant alfalfa varieties and four different sites of China ongoing. They were planted in the summer, in our summer and we’ll just see what those results bring. So far they are looking quite promising.

We are getting very excited and we’ll see what our partnership with SGI is able to do right away with that, because they do have connections in there. In fact some of those guys on this call like Mark Harvey have sold different types of seed into China. We are very poised to jump on that, when that becomes a reality.

Matt Koranda - Roth Capital Partners

Great, that’s helpful guys, and that’s if from me. Thank you.

Mark Grewal

You bet.

Operator

(Operator Instructions). Your next question will come from Ian Gilson of Zacks Investment Research. Please go ahead.

Ian Gilson - Zacks Investment Research

Yes, I got a few small questions.

Mark Grewal

Hi Ian.

Ian Gilson - Zacks Investment Research

Australia in prior years has been producing, I believe the number was around 12 million to 14 million pound a year.

Mark Grewal

This is an overall production Ian or just the SGI company?

Ian Gilson - Zacks Investment Research

The Australian operations.

Mark Grewal

The Australian operations, its...

Ian Gilson - Zacks Investment Research

10 times.

Mark Grewal

Now that seems a little bit high, Ian. We put it into tons, about 3. In previous years about 3,800 to 4,000 tons, which is 10 million, around something like that, 8 million pounds.

Ian Gilson - Zacks Investment Research

All right. Now we are now producing considerably more than that.

Mark Grewal

That’s correct.

Ian Gilson - Zacks Investment Research

What is the reason? And if its weather related, what’s the probability of it going back down from the high levels to where you were previously.

Dennis Jury

Ian, you’re talking about what the total Australian production is or SGI’s. I mean the total production of the whole of Australia has been typically in the 10,000 to 11,000 metric tons on an annual basis.

SGI’s share of that production has increased very year since we started operating 10 years ago. So the main gain for us has been through talking a larger portion of the production area for lucent seeds or alfalfa seeds in Australia. Think about market share growth rather than – I mean obviously this comments variably from year-to-year, but the underlying trend is that we are taking a larger share to this area and that’s what’s driving our larger tonnage.

Ian Gilson - Zacks Investment Research

But if I remember correctly, when the merger occurred, the estimated production from SGI was significantly lower than what you actually produced.

Dennis Jury

That’s the seasonal – well, the harvest was better than we anticipated, because of seasonal factors.

Ian Gilson - Zacks Investment Research

Okay. Why was the harvest better and was the weather better than average for growing conditions. I’m trying to sort of assess the risk of the availability of seeds being reduced in Australia as it has been in parts in California over the past couple of years.

Dennis Jury

Well, in my defense again that will be to grow our acres even further to tie up that question, because I mean there is obviously variability of seasonal factors. There is also a larger exposure in Australia, better less for us to non-irrigated land, which is probably the main driver of the variability, as our portion of production on irrigated land is much garter fortunately than any other presence in Australia, because that tends to take out some of that variability.

Ian Gilson - Zacks Investment Research

Okay, on the total pounds of seeds sold in the fourth quarter, do you have the number?

Mark Grewal

Yes, Ian this is Matt here. It was approximately 3.9 million pounds. Are you referring to SGI or just the business?

Ian Gilson - Zacks Investment Research

Total number of pounds sold that generated 12 point whatever it was million dollars.

Mark Grewal

3.9 million pounds.

Ian Gilson - Zacks Investment Research

Okay. How many acres did we have in production at the end of the quarter?

Mark Grewal

Well, Mark do you want to talk about that? I’ll let Mark Harvey address the acres of SGI from the last year. We’re in the 10,000-acre range in California, total, of which 4,500 or so in the San Joaquin Valley and the rest are acquired through contracting and sourcing.

Ian Gilson - Zacks Investment Research

That includes the acres that we used for stevia?

Mark Grewal

No, no, stevia acreage is totally separate and we took out almost all the acres in the stevia and went to total research.

Mark Harvey

And there was 22,000 acres of irrigated land on the long-term contracts at the end of June and 12,000 acres of non-irrigated land at the end of June or seed genetics.

Ian Gilson - Zacks Investment Research

Okay. As we developed the dormant varieties, are they going to be varieties that you have now or varieties that would be drought and salt resistant.

Mark Grewal

The current startup would be varieties that we have in place now, but our breeding program will continue in all areas to improve the variety of development. I mean that’s one of the number one key things of joining the Australian operations. They have a tremendous breeding program, coupled with our 30 year breeding program and are working together and we are adding sites in other parts of world too Ian.

So we are going to continually strive to enhance and improve our yielding, our salt tolerant, our heat tolerant, tropical and different traits needed from insects, nematodes and these types of things into our varieties constantly.

Ian Gilson - Zacks Investment Research

Now and the final question is that the revenue you generated in the fourth quarter was primarily was Australian and not from California and therefore the gross margin number is an Australian gross margin number and not a California number. How do you see the gross margin is for the California production as we work out running through 2014 fiscal year?

Mark Grewal

Well, Ian as I mentioned earlier, we believe the proprietary S&W varieties were the low 20’s sort of margin profile and your public and non-certified varieties will be in the low-teens.

Ian Gilson - Zacks Investment Research

So that is potentially a 20% improvement in gross margins. I’ve said percent, not percentage points, but 20% improvement in gross margins out of California.

Mark Grewal

Well I’m not going to quantify it, but we are certainly seeing gross margin improvement and we continue to expect to see those improvements throughout the remainder of this fiscal year that we are...

Ian Gilson - Zacks Investment Research

Okay, thank you very much.

Mark Grewal

Thank you Ian.

Operator

Our next question will come from Keith Gil of JHS Capital. Please go ahead.

Keith Gil - JHS Capital Advisors

Congratulations and my question is for Mark Harvey. How are you Mark?

Mark Harvey

Very well, thanks Keith.

Keith Gil - JHS Capital Advisors

I just wanted a little clarity, on the 22,000 acres in Australia under irrigation, I would assume that’s fully planted.

Mark Harvey

That’s fully planted and we are tightening through various acres.

Dennis Jury

Yes, its Dennis again. The important thing to bear in mind is that not all planted acres are necessarily harvested in every year, because our growers have contracts to seven to 10 years. There’s some years when they might for various reasons have a non-harvest year. And so if he is looking at used acres, simply dividing the number of pounds that we produce by the number of acres under production is not going to give you a meaningful figure that you can compare from each year.

Keith Gil - JHS Capital Advisors

Fair enough. And how costly would it be to activate or start forming on the 12,000 non-irrigated?

Mark Grewal

(Inaudible) land is already farmed with Keith with alfalfa, but it relies on natural rainfall and the area has about a natural rainfall of 16 to 18 inches of rain a year. So if it’s a poorish rainfall year, the farmer may decide to graze it will animals and if it’s a good rainfall year, particularly in the summer, he might decide to prepare it for a seed crop.

Keith Gil - JHS Capital Advisors

Thank you, thank you, and congratulations again. I appreciate that.

Mark Grewal

Keith, thank you very much.

The last thing I want to just say is, we are trying to get away from all the acres and the pounds and all that and we are trying to just give you the one thing we are trying to provide an insight is an estimate pounds per year for the whole group seed stock. So we note that that way it simplifies our equation, it simplifies yours, it gives you the ability to do whatever modeling you want.

So what Matt Szot said is, his numbers with all the team is showing an 18 million to 19 million pound forward going right now and then we’ll see where that takes us, but we will prefer to just stop, sit there and talk about how many acres are in the valley here, how many acres are here, how many acres are there.

Because if that, like Mr. Jury say that sometime, some people run into hey or some other type of production and then not necessarily be a seed, but we’re going to continue to enhance and expand our seed operation. The future is bright baby, you better wear shades.

Operator

Our next question will come from Rich Hens (ph) a Private Investor. Please go ahead.

Rich Hens - Private Investor

Hi there, just a quick question. Down in Imperial Valley, am I correct in assuming that’s going to be eventually replanted to the S&W premium brands.

Mark Grewal

Yes, Rich. Now we do have some very good branding that was purchased with the acquisition of IV Seeds, LaJolla, Catalina, Saltana, these type of varieties, and some of those quite frankly were actually bred through the S&W breeding team. So we own those now. So those are going to be bred and also you are correct.

Remember, we just bought this thing last October and we were not able to change the rotation that the farmer has. Also remember when we built to certify the elite proprietary varieties, they have to be certified and you can’t just put a variety in another sea field. You have to take that filed out, go to a different crop, rotate it and then go through the California Crop Improvement Associations process, that they get that new variety registered in the service.

Sometimes you only have to wait a year, because it may be the same dormancy, but there are processes and regulations you have to follow. So this is a slow transition, but we hope that in time we will continue to ramp that up. That’s our goal, and also we are going to ramp it up in Australia.

Rich Hens - Private Investor

So how long until they be 10% margins down in Imperial Valley come up to, say I don’t know, pick a number, 15% I’d say.

Mark Grewal

Okay, I’ll let Matt kind of answer that, but we are not shooting for any 10% margins per se. We are going to optimize and that creates a registration process of bringing in the Australian elite proprietary varieties and blending them in with our other mainly IVS models. So we are going to continue to actually improve their margins also.

Rich Hens - Private Investor

Got you. Okay, all right. Thank you.

Mark Grewal

You’re welcome.

Operator

And ladies and gentlemen that will conclude our question-and-answer session. I would like to turn the call back to management for any closing remarks.

Mark Grewal

Thank you Denise. Again, we’d like to thank everyone for participating on today’s call. I want to give a special thanks to Dennis Jury and Mark Harvey for joining us on this; I think it’s a momentous call. Personally, for me we are turning the corner. This is a very critical point in our growth stage.

Like I had stated earlier, we will be in New York this week presenting at the Craig-Hallum conference with Lytham Partners and we may also have some time available to get together while we are there with anybody that wants to talk or have another question they weren’t able to ask today. Just contact Robert Blum and he will coordinate it.

We look forward to talking with you again at the conclusion of the current quarter. We hope you have a great evening. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: S&W Seed's CEO Discusses F4Q 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts