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S&W Seed Company (NASDAQ:SANW)

F1Q14 Earnings Call

November 15, 2013 4:30 PM ET

Executives

Robert Blum – IR

Mark Grewal – President and CEO

Matthew Szot – SVP and CFO

Analysts

Shannon Victor – Feltl & Company

Philip Shen – Roth Capital

Riley McCormick – Tracer Capital

Ian Gilson – Zacks Investment Research

Frank Smith – Weirton Fund

Keith Gil – JHS Capital Advisors

Bill Smith – William Smith & Company

Operator

Good afternoon and welcome to the S&W Seed Company, First Quarter of fiscal year 2014 Financial Results Conference call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

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 first quarter of fiscal year 2014, which ended September 30th, 2013.

With us on the call representing the company today are Mr. Mark Grewal, President and Chief Executive Officer; Mr. Matthew Szot, Chief Financial Officer.

At the conclusion of today’s prepared remarks we will open the call for your question-and-answer session. Anyone participating on today’s call does not have a full text copy of the release, you can retrieve it from the company’s website at swseedco.com or numerous financial websites.

Before we begin with prepared remarks, we submit for the record the following statement. 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 Litigations 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 30th, 2013, 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. Over the past two years, our goal at S&W Seed Company has been to build an organization that can become the premiere alfafa seed company in the world.

And to leverage off the agricultural platform we are creating. In order to become the premiere alfafa the seed company, we need to accomplish a few goals. First we needed to leverage the core assets of the company, which included a successful breeding of the most salt tolerant, non-dormant alfalfa seed genetics in the world, by expanding our production capabilities.

Currently we needed to diversify our production from a geographical standpoint, for a number of reasons, including weather, trade isolation, political to name a few. Our acquisitions of IVS and SGI, helped us move toward these goals. They brought with them access to large contracted acres and seed sourcing capabilities. Additionally they had large networks of dealers and distributors across the globe and in the case of SGI, a world class team of breeders as well.

As we have discussed, the goal continues to be maximizing, or the term we like to use, is optimizing, the assets that we have. Which now include access to increased levels of contracted acres, to drive increased margins and profitability.

Some of this will occur over the long-term, such as the conversion of production field to the S&W elite varieties. And some of this will occur in the near term, such as with the blending or optimization of certain varieties.

Our goal is simple, obtain the greatest return we can on the absence of the organization. Next we need to be looking to the future to expand our product offerings. We have signed agreements with Monsanto and FGI, Forage Genetics International, to develop biotech or GMO based non-dormant alfalfa seed varieties based on a couple of our leading salt tolerant varieties. While not all regions of the world allow the use of GMO seed, we want to make sure we can meet the needs of those customers that went in demand our varieties with Roundup Ready trait’s.

We also need to expand our product offering into the dormant alfafa seed market or areas of the world where it snows and the seed goes dormant over the winter. This is a huge marketplace and with the acquisition of certain high quality germplasm we have positioned ourselves to enter this space.

We are still early in the process I believe that there is room to expand this side of the business in the future. Also our breeder’s in Australia have done an excellent job of developing a variety for the tropics that allow for alfafa to grow in certain regions of the world previously have been unable to do so. These regions such as Vietnam one of world’s largest areas recently been built are currently shipping in aid from other countries to feed their animals.

We believe the ability to meet the needs of these customers can be a significant opportunity for S&W going forward. In my opinion we have made a ton of progress in last half – last year and half.

We have a number of great assets at the disposal of S&W right now we have world class varieties some of the best breeders in the business unparalleled access to diversified production that ranges from California to Australia a wide range in network to dealers and distributors and a team that is committed to making it all come together. We are putting the pieces in place while there are always absent flows to any plan, we believe we’re positioning the company for great success in the future.

Now let me turn the call over to Matt Szot our Chief Financial Officer for a review of the quarter. And I would go into more details on the near term outlook for the industry and answer any questions you may have. Matt?

Matthew Szot

Thanks Mark. Since everyone should have access to the summary of financials in the press release let me provide some additional details on a few areas. The first quarter revenues totaled $12.4 million compared to $6.7 million a year ago. Revenue was broken down as follows. IVS contributed $4.8 million in the revenues for 39% of total revenues SGI contributed $4.6 million or 37% of total revenues. And S&W varieties contributed $3 million or 24% of overall revenues.

Please recall the IVS was acquired on October 1st 2012 and SGI was acquired on April 1st 2013 and therefore not included in last year’s first quarter. As discussed in our press release S&W proprietary revenues decreased primarily as a result of not having shipments ready for Saudi Arabia. Overall revenues at the Saudi Arabia represented 34% of total revenues for the quarter versus 72% in the prior year.

Total gross profit margins in the first quarter were 18.6% this compared favorably to the prior year while gross margins were 16% and compared to 20.4% in the sequential fourth quarter. The change in gross profit margins from the fourth quarter was simply due to a change in revenue mix whereby Q4 revenues consisted of 84% of proprietary varieties versus 61% proprietary in the current quarter.

Overall margins from our proprietary product lines were in the low 20% range during the quarter while non-proprietary margins were approximately 15%. As we look to the remainder of the fiscal year gross margins from our proprietary varieties are expected to be in the low 20%.

Our margins from non-proprietary varieties would likely be in the low to mid-teens. Consolidated gross margins will likely vary quarter-to-quarter based on revenue mix however as we’ve been communicating we expect to see continued improvement compared to last year.

SG&A for the first quarter totaled $1.6 million compared to $750,000 for the comparable period of prior year. The increase in SG&A versus Q1 of the prior year was primarily due to the acquisition of SGI and IVS.

In addition non-cash stock based compensation totaled $215,000 in the current quarter versus $91,000 in the comparable period to prior years. Stock based comp represents the portion of options restricted stock and RCU’s which are best during the quarter.

In particular I’d like to point out that $145,000 of this expense related to RCU’s granted in March 2013 these grants were valid for accounting purposes based on the stock price on a daily grant and are being amortized over the record service period a 4.5 year schedule.

SG&A expenses decreased considerably from the $2.4 million excluding acquisition costs incurred in most recent fourth quarter of fiscal 2013. As a percentage of revenue SG&A expenses were 13% of revenues in the current quarter compared to 11% in Q1 and compared to 90% in the most recent fourth quarter.

As communicated on our last call our go forward SG&A spend is estimated to be in the $1.7 million to $1.8 million range per quarter. From an EBITDA perspective we saw improvements from Q1 compared to the prior year adjusted EBITDA totaled $695,000 an improvement of 120% from the first quarter last year.

From an inventory perspective we’re maintaining our estimates of being able to produce and source between 18 million pounds and 19 million pounds of seed for the calendar year 2013 harvest cycle. All the 18 million pounds, 19 million pounds approximately 70% to 75% will be proprietary varieties and 25% to 30% will be public and non-certified varieties that have historically been part of the IVS business model.

As we reported last quarter we had production from Australia of approximately 10.6 million pounds from the spring 2013 harvest and approximately 2.7 million from our S&W proprietary variety in the fall 2013 harvest. The remainder comes from a combination of our production and sourcing from IV Milling. We entered the quarter with net working capital of $21 million.

I will now turn the call back over to Mark.

Mark Grewal

Thank you Matt. It is sometimes difficult for many to understand the nuances of agriculture. I’ve been an involved in this sector my whole life and sometimes I take things for granted. Let me do the best to go into some details of what we currently see taking place in the alfalfa seed industry and provide you with a view of how we tend to look at our inventory and the value that it has. As we discussed previously our production at the company’s Australian operations came in stronger than expected offsetting lower production contribution from California proprietary varieties.

Additionally there was severe weather that impacted the Imperial Valley region in California estimating to have damaged more than 20% of the supply in that region. S&W was fortunate to have already had a strong harvest from Australia in the bag as well as having completed the harvest of this internally farmed operations that are based in Imperial Valley prior to the storm city.

However the weather impacted in the Imperial Valley is placing the stream on already low global inventory levels for non-dormant alfalfa seed. Weather can certainly have an impact on any agricultural operation and it is one of the key reasons why we have made the decisions to become geographically diversified. As many of you saw from the article in Hay & Forage Grower the market is currently anticipated to be very tight hitting into the spring 2014 planting season.

This is not just a non-dormant issue either this ranges across the spectrums as there was weather that impacted many of the dormant varieties as well overwriting all of the weather issues is at the supply chain saw low inventories to begin with according to reports which have been our belief all along.

It is interesting because when Australia came out of the good crop this year following two poor years many seed buyers in the industry weren’t sure what direction the pricing would trend, this onset of uncertainty was quick and have some level on impact on the SGI distribution channels during the first quarter.

It was our belief all along that regardless of the impact of the California harvest that the supply chain was low in the near term and that pricing would continue to be strong as it turned out the California harvest was weaker than expected. And it is having an added effect to this total supply and demand equation. While we are focused on operating our business for long-term focus there are always items that tend to kind of dictate how you need to operate in the near term whether it is weather issues or political issues.

At the end of the day it’s our goal to obtain the most value for our seed inventory that we have, the reason we think this is that our inventory each year is in essence set. We cannot go back and maintain more seed from Australia this year now we can go back till we back and obtain more seed from California this year.

We know what our inventories are for the most part and therefore we know what the revenue possibilities from that seed are. And their variable being what price we obtain for the seed. It is my opinion based on over 33 years of experience and that of my management that we are going to see continued strength in pricing going forward. So we will not hold seed forever and we will continue to meet the needs of the key customers on a timely basis. But we do not want to leave money on the table as many of you are aware of how the seed holds its effectiveness for many years. And therefore the value of our inventory does not become obsolete.

So I hope you can see in any agricultural company that it is very difficult to pinpoint exactly where revenues of the pricing will be. There are always a number of moving targets and external factors in play. We are doing our best to deliver solid year-over-year performance while maximizing the value of the assets that we have.

Again our focus is on maximizing the values of our seed inventories. We will do our best going forward to provide as much inside to year and quarter as we possibly can. We understand that seed companies are unique but it is important for those on the street have an added level of understanding as we see it.

In the past we’ve often provided many of the guide posts to understand the business this is a time to see and inventory and where we see pricing but we realized that perhaps we need to be a bit more specific. At the same time we hope that investors realize that there are circumstances that can change any assumptions both positive or negative.

We currently estimate revenues for the year would be in a range between $50 million and $65 million. We come to this estimate based on our currency inventory on hand estimated new production and seed sourcing inventory expectations private companies fiscal year in from Australia and the IVS business, our current outlook of market demand, the ability to obtain seed pricing within our expected ranges and were largely depend on how much inventory we may or may not hold over the next fiscal year.

We understand that this range is large but our goal is to maximize our inventory and as that means we carry over seed to the next year to obtain values. We may do so that means selling out inventory prior to the end of the year we may do that as well.

As we look at the second quarter we believe that revenues will be between 11 million and 13 million and expect strength in the back half of this year. We strive to avoid timing the market with respect to pricing but there are selected times or factors that play dictate that is the best thing to do.

Overwriting all of the near term items one thing that I want to continue to stress to those of you on the call is that we believe we’re positioning in company to benefit from a huge macro need in the world right now and that is the need to feed and ever expanding population with the increasing consumption habits with less arable land at the disposal of farmers.

There are always continue to be movements up or down at any given time but it is our strong belief that the tide will rise strongly over the long term but the tremendous set of alfafa seed assets and a plan in place to expand upon that in the future we’re positioning S&W to be a leader for years to come.

As always we appreciate your support and we remain dedicated to continue repaying your support many times over.

With that said lets open up the call for your questions. Denise?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. The first question will come from Michael Cox of Piper Jaffray. Please go ahead.

Matthew Szot

Go ahead Mike.

Unidentified Analyst

Hi this is Amanda representing Mike here on the call this afternoon. Thanks so much for taking my question. The one question, couple of question that we had is how should we think about sales mix in 2014 in terms of geography is it still skewed towards Saudi Arabia does the SGI kind of changed the geographic mix.

Matthew Szot

Do you want me to start or you want to start then?

Mark Grewal

The sales mix is a very unique and dynamic movement geographically area right now and that I’m seeing a very strong potential in dormant actually domestic and at the same time the Saudi market is going to come in and get prepared for the spring planting. So our customers were actually be at the big alfafa symposium in December and they will start putting in some, some solid orders we have wearable and we’ll have to start shipping for that spring time. So the Middle East and Africa are always going to be a component.

We have our plant meter right now in Argentina we’re looking at slowly ramping that area up and Mexico is going to become stronger and stronger. So I am very optimistic about the domestic market especially Forage export market getting larger. And so there’s going to be a more need for hay operations in the United States and we see that as a big plus as they move hay onto areas that don’t have it in the world. I don’t know if that answers you much Matt you want to add anything to that. Amanda did I get you or did we miss something?

Unidentified Analyst

No you are good I was going to kind of expand on that just in terms of future seed production as you are mentioning the Argentina and Mexico markets and I guess across the globe are you intending on building upon that 18 million pound to 19 million pound inventory you have this season as we look at the next year?

Mark Grewal

Yes I mean we organically we have, we hope that there is a 10% increase. We do want to stress that we’re going to wrap up and move more and more into the Australian southern hemisphere market because that’s the gateway to Asia. But also because we need more of our elite proprietary S&W varieties now starting to be bred so by March of this year we’re going to have a lot more acreage of S&W and the southern hemisphere to help bring up the need that we need for some inventory in that aspect. Matt do you want to add?

Matthew Szot

Amanda this Matt I’ll add to that. Australian production is really critical first because it’s such a lower constant production for us and we do see the greatest opportunity to expand production in that region.

Unidentified Analyst

And then in terms of how it’s really a kind of drives that margin as we think about gross margins over the next couple of quarters as sales volumes ramp up are they going to kind of improve as we reach at the end of next year?

Mark Grewal

Amanda I mean we’re sticking by minimum of our 20% margin overall for the year as we do believe that price [ph] will continue to enhance that margin especially to our optimization program. We’ve only moved about 7% of the product in the first quarter sales with optimization that by doing that within Australian blended California product our margin enhancement would be greatly enhanced.

Matthew Szot

As the larger portion of our production is produced in Australia our margins should continue to improve.

Unidentified Analyst

Thanks so much for taking my calls guys.

Mark Grewal

Welcome Amanda.

Operator

[Operator Instructions]. The next question will come from Brent Rystrom of Feltl & Company. Please go ahead.

Shannon Victor – Feltl & Company

Hi yeah this is Shannon Victor on for Brent Rystrom. In regards to acquisitions you indicated that you’re interested in them. I was just wondering if you could update us on your stock process for making acquisitions. And then a follow up to that for future acquisitions will most of them being alfafa or were you going to other areas?

Mark Grewal

What we may have okay you got a lot there so let’s we’re always constantly looking at acquisitions if you look at the history of what we’ve done you are going to be very accretive of course in the first place that we’re always going to look is leveraging our strengths which are in the alfafa business. There’s a number of different avenues of those strengths you want to look at distribution, you want to look at production, you want to look at the sales regions and you want to look at branding.

And if you have routes into geographic areas that you do not sell into currently that’s just adding and taking market share. So we’re going to continually look at it ramping and building this company upwards, increasing our production numbers and taking over market share through our branding, breeding and market driven operations. Matt do you want to add anything? Add to that part of the question?

Matthew Szot

I think that covered it.

Mark Grewal

Now what was your – did you, you had another component to that?

Shannon Victor – Feltl & Company

Yes the second part was just in future acquisitions will you be staying with mostly alfafa to will you be going into other areas as well?

Mark Grewal

Well I mean we’re going to leverage our strengths so that doesn’t mean that we wouldn’t look at something that’s in the Forage and fodder region that’s compatible to what we’re doing but we’re a seed companies we’re looking at seed. We’re really looking at focusing on seed or genetics breeding and what that breeds of course you know we’re still in Stivia so if there’s something that looks like it’s going to help that opportunity or to do something in that avenue of the that food business we’re going to be looking at it also but we’re very strong in what we’re. We know we’re the leaders, we’d cutting in three years, we’d become the largest non-dormant seed company in the world and we’re going to continue to grow that.

Shannon Victor – Feltl & Company

Perfect. Thank you for taking my question.

Matthew Szot

You are welcome Shannon.

Operator

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

Mark Grewal

Hey Philip.

Philip Shen – Roth Capital

Hey guys. How are you?

Mark Grewal

We’re good.

Matthew Szot

Great.

Philip Shen – Roth Capital

Oh you’re great. I want to make sure I heard something right. I think you’re talking about potential 10% increase in production next year at a minimum, is that where you’re looking for?

Mark Grewal

I mean I would say inorganically, we’re looking at least that. And if we do something else, we’ll wrap that up so we’re looking at enhancing our elite proprietary varieties. Moving as much of that production as warrants southern, and southern means not just Imperial Valley the sub but to the southern hemisphere of Australia. And that requires more acreage ramp up, and we’re getting more acres and we’re out contracting with growers Philip, so we’re looking for more production.

Philip Shen – Roth Capital

Great. Let’s talk about pricing for a moment, in this upside pricing environment, where’s pricing today and how much higher do you see pricing going?

Mark Grewal

Well I don’t know how high it will go, I’ve been in this business since 1979 and it’s gone up continuously, so where’s it going to go? I don’t know, but what we’d like to do Philip, and you may want to spend some time looking at this yourself when you have – We look at the benchmark of Cuf 101, Cuf is the California University Foundation variety and it’s the public domain nine dormant that everything’s paced softer.

We’re currently in the spot-market if you’re out trying to buy from a grower, that price of that cut now is between $4 and $4.10 a pound. So, to have a base of a common certified variety at that level, means that the proprietary varieties, and by the way, with some new research just came out.

We’ll be getting in out soon from Arizona, but we have varieties that went over 2.5 tons per acre, per year over Cuf, so these are going to come in premiums. And we have to decide where we think that premium can be. Depending on who the customer is, his relationship with us and where we think that marketplace is going to go.

At the same time Philip, the better component to get a handle on, and it’s probably harder, it’s actually our optimization, where we blend. And see the blending is so different because, what Matt Szot was bringing up, is we’ve got an opportunity now to really lower our production costs as we move south.

And as we do that, the amount of that seed, that’s SGI driven versus ours in those components and branded blends, will really enhance the margin. So we see the long-term as a very, very positive bottom line numbers going into the S&W year-end results.

Philip Shen – Roth Capital

Great Mark. As a follow-up there, I’ve always kind of generally thought about your, let’s say Cuf's at $4. Your seed is maybe at $4.50 or so, as we go into this period of again expanding prices. Do you see any I mean opportunities to expand your price premium, relative to Cuf, is that something that you guys think about doing, what are your thoughts there?

Mark Grewal

Yeah, we’re constantly looking at that ratio, the other thing that you’ve got to look at Philip, is there’s a market component, and let’s just say that its, let’s use the term a law mark type of market, where prices are a very important component. And those people tend to buy those public varieties, but all of a sudden, quite a bit of that production’s been wiped out or very minimized and they’re not going to be able to get it.

So it’s actually going to have, if they want a product, and they want to grow and they’ve got to feed a cow, they’re going to have to buy something and they’re going to have to pay more for it. So with our marketing guys, constantly day-by-day are really looking at this market.

And it’s getting so exciting to me personally, that we’ve have had to go down to just a weak price close. So when we give a price out, it’s only good for seven days Philip, because we may have to up the ante. I don’t know Matt, do you want to add anything to that?

Matthew Szot

Yeah I think longer term, one of our other strategies is ensuring we’re getting paid for our superior genetics. And that should in itself, because we out-yield Cuf so significantly, it should translate into improved pricing and margin longer term. And certainly a long-term goal of the entire management team.

Philip Shen – Roth Capital

Great. On the last conference call, I think you guys talked of pricing being at around four blocks per Cuf. And I’m surprised to hear that it’s still around $4. What am I missing there?

Mark Grewal

You and I will have to actually look at that because I think you could have contracted as certified field or $3.75 or somewhere around there. So there could be some $4 numbers but in one month we’re seeing a pretty big ramp up and we’re having to determine what that ramp up means. Our minus was not going to be enough products.

Philip Shen – Roth Capital

Right, and I think the week, one week price quote is this telling. Are you changing gears here, can you give us an update on the new utilization. How do you expect utilization to ramp up over the next year?

Mark Grewal

It’s really a strategic move on our part, on who we want to partner with and how much time do we want to dedicate to their market ramps. So as an example, we’ve actually gotten pretty big with RSI right now the Syngenta is seed company. And they’re really taking over the triticale market.

I think Dan Carsten will have to check his numbers, so don’t – obviously but somewhere between five million pounds and seven million pounds of triticale that’s just been cleaned at our mill when you couple that with the product that we’re actually bringing up from Imperial Valley, up 2.5 three million pounds of seed Alfalfa.

So we’re slowly trying to look at co-packing, what that means, how we’re going to put it into our product line and who we want to align ourselves with. It’s going to become more critical as GMO becomes bigger.

Matthew Szot

Right and I would say that the utilization percentage is pretty consistent with historical period, meaningful move up or down.

Philip Shen – Roth Capital

Okay, got it. One last question, I’ll jump back in queue. Matt, I think you were talking about a shift of production to the south hey and Mark you were talking about this as well. Can you quantify that for us a bit, how much of the production might be shifting during the 2014 growing season?

Matthew Szot

Well I think our production levels in the an Joaquin valley, we would ideally target for them to be the same or as Mark said, we’re certainly targeting to grow that at least 10% ideally. But the incremental acreage we had on to that will more likely becoming from the southern regions of either Imperial Valley and Australia.

Mark Grewal

There’s a strong climate right now, I’m not going to go into the pros and cons or anything, but there’s a strong limit right now on this non-GMO area. And that bodes well for this, the Imperial Valley and for the southern hemisphere. So you’re going to see us continually move more acres of production in those areas.

Philip Shen – Roth Capital

Great. Thanks Mark, and everyone else as well. Now I’ll jump back in queue.

Mark Grewal

Thank you Philip.

Operator

Our next question will come from Riley McCormick of Tracer Capital. Please go ahead.

Mark Grewal

Hey Riley.

Riley McCormick – Tracer Capital

Hey guys, how you doing?

Matthew Szot

Good Riley.

Riley McCormick – Tracer Capital

So a couple of questions. First on your revenue guidance for the year, divide that behind of revenue guidance is that assumed, not holding back any inventory?

Matthew Szot

Yeah.

Mark Grewal

Depending on margins.

Matthew Szot

Assuming our current inventories and our expectant sourcing through the remainder of the year. That would get us to the high end of the range that we’re providing and it will be like the whole back any portion of that, then obviously they would be less than that number.

Riley McCormick – Tracer Capital

But can you help me, can you help me get to that because if I look at the high end, there’s supply of about $3.50 per pound. So with Cuf it’s $4, with S&W proprietary its $4.40 and with Australia it’s $3.20. The only way you get even near to $3.50 is assuming proprietary S&W 10% the total mix. Is it going to be that low percentage?

Matthew Szot

S&W proprietors probably are about 15% of the total mix.

Riley McCormick – Tracer Capital

Okay, okay. And then so to my next question, last quarter you guys talked about IVS margins being low to mid-teens, perhaps I just low teens now you’re saying low to mid-teens. Is this just some antics or are you guys increasing IVS?

Matthew Szot

Our IVS margins in Q1 were in the 15% range, and we think that they’ll be in a similar range for the remainder of this year with an opportunity to, over the sequential quarters to make progress each and every quarter as we roll off the optimization program further.

Riley McCormick – Tracer Capital

So if I’m correct because is this slight uptake on the IVS margins…

Matthew Szot

Yes that’s correct, that’s correct.

Riley McCormick – Tracer Capital

And then third question on blending, you talked about proprietary gross margins, being in the low 20s. Why wouldn’t blending start to raise, is it a function of purely timing if that could happen on the back half – you talking about S&W seeds –

Mark Grewal

Object its more technical than that Riley only because we have to actually with the breeders we want to make sure that we give out the finest product and so when we predict a blend together and say it’s going to be a percentage of Catalina, a percentage of LaJolla, a percentage of an SGI, say supersonic.

We have to get that brand approved and registered in the country we’re going to sell it in. So some of that takes three to six months to actually develop that and then have that broker or grower base accept the information that we’re giving them, to move within to that market place.

So you’re going to see that enhancement really do something, I mean currently in the first quarter, only about 7% of our sales were optimization, as we move forward we hope that, that becomes a bigger, bigger play which will continually enhance that margin numbers and get those, and get us, just say a price not as important overall as the net back to the S&W.

Matthew Szot

Riley this is Matt, just clarify, our groups stock were in other words the Australian material, it’s hard to block it into one particular category because we can use it in plans of non-served product as well as blending in with our proprietary, as our proprietary varieties. But certainly that optimization is part of the IVS margin uptake that we just talked about. And we think that over time that’s going to, should translate into margin improvement throughout the entire organization.

Riley McCormick – Tracer Capital

Right, and that was my question, I mean obviously seen some market in that sounds like the matter of timing. Usually takes time to get these things done, can you guys help us understand what 2015, proprietary gross margin because it’s obviously a big part of the story and you are right and I think it would be helpful if you let people, let us know, where that low 20s get once you have a full year of all this registration etcetera behind in your results?

Mark Grewal

I can only really give you Mark Grewal’s personal opinion on that and I’m always happy to do that. I think 2015 also brings in our first sales into GMO Riley domestically. So I think as we wrap up further, and we get into some of these specific lands, you’re going to see that in 30% plus range. I think that’s a realistic number personally. I don’t know Matt, if you want to talk?

Matthew Szot

I mean it depends on obviously a number of factors, certainly production costs are going to come into play there. We certainly are targeting improvements from the 20% range that we’re in the current fiscal year that’s for sure.

Riley McCormick – Tracer Capital

Right, but if you’re growing production in Australian and Imperial Valley, I can’t imagine production has been the headwind that they are the San Joaquin valley, right?

Mark Grewal

Well, what I will say is that we do have some specific contracts, that are like first year contracts. There’s two things to remember about first year contracts this year, that went out. Normally your first year’s your lowest yield year and then if they didn’t grow a crop in that year for seed, we do have contracts, we’re okay, the first year’s going to be A. Then the second year, it becomes seed, and our second year contracting and some of those contracts is at a lower price than we are currently at right now.

Riley McCormick – Tracer Capital

But taking everything you’ve said Mark, but the beginning should make some dormant, which would have higher gross margins as well, right? It’s not unreasonable to think the proprietary of the non IVS, could have your high 20s or the – that you talked about?

Mark Grewal

Oh absolutely 2015, okay that’s true.

Riley McCormick – Tracer Capital

And then last not really a question but a comment on somebody asked, somebody already asked question I was going to ask but as a shareholder, I urge you guys to focus on our profit. You guys have genetics, you guys have the product, you have a market that is right for growing your very impressive share. I think focusing on anything else outside above that or so it must be under Forage including CVS is a mistake right now I think that’s a great goal for about five years from now. But I would just love you guys to focus on what your strengths are right now and that consolidating the alfafa market.

Mark Grewal

We heard you loud and clear Riley, thank you for that comment.

Riley McCormick – Tracer Capital

Thanks guys.

Matthew Szot

Thank you very much.

Operator

Our next question will come from Ian Gilson from Zacks Investment Research. Please go ahead.

Ian Gilson – Zacks Investment Research

Right, thank you very much. Matt, could you give us the pounds of seeds sold in the quarter, pound of seeds currently in inventory?

Matthew Szot

Sure Ian, and I do have to point out before I do this. These are different price points of seeds but we sold about 3.5 million pounds of seeds during the quarter. And we ended the September quarter with just under 11 million pounds seed on hand.

Ian Gilson – Zacks Investment Research

Okay, looking at IVS on a stand-alone basis, what was the prior year period of revenue, compared to the 4.8 which you quoted earlier?

Matthew Szot

IVS did 4.5 million in Q1 of the prior year.

Ian Gilson – Zacks Investment Research

I’m looking at the weather during the same periods, were they roughly equivalent or was last year’s weather worse. You need to remember last year, had a couple of really bad storms?

Mark Grewal

It did, it had some, almost every week and it was raining, but I have to dig that information out to put it in perspective because I do think the acres this year are larger than last year. And so the impact may not be as severe last year as it has been this year. So I need to look at those numbers and actually get back to you, I’ll have to have somebody get that information to you ASAP. But I can’t answer your specific question at this time.

Ian Gilson – Zacks Investment Research

Great thanks very much.

Mark Grewal

You’re welcome Ian.

Operator

Your next question will come from Frank Smith of Weirton Fund. Please go ahead.

Mark Grewal

Good afternoon Frank.

Frank Smith – Weirton Fund

Hey Mark and plus the team there. Can I give you a question for you on the Saudi Arabia. I notice you were saying the percentage of sales for Saudi Arabia were down. Is that just because of the mix or just they planted less there or did somebody else plant there. Can you just get a little idea on that?

Mark Grewal

Well on our specific instance, we didn’t, we couldn’t meet the shipment at the time because of our harvest and where we were in cleaning. So there was a potential for a lot more seed going out of it but we’re not, we haven’t lost, we haven’t lost that acreage yet Frank because it could be planted in the spring. And our main distributors really exclusive with us in that market so it’s going to be but in fact if you could shareholder meeting I’ll probably be there. We’ll, we can seat there and talk to him about it but the bottom line is they’ll come back in December and start processing seed get it landed on the ship so they could plant in the spring. And it’s more of a shift and just when we, when we put that seed out more than did not get a plant in.

Frank Smith – Weirton Fund

So what were they doing in third and fourth day?

Mark Grewal

Well I think – yeah they’re going to while you’re seeing an increase in an hay, in the export market of Forage it’s getting larger all the time. So I mean the latest, the latest numbers are that the total USA exports are over $1.3 billion so I mean that just bodes well with what’s going on in the alfafa market. And that this market is getting larger, it’s getting more important.

The Asian countries not just China but Korea, Japan these countries and not just the Middle East but these countries need hay. So it is the function of can you do it there, can you do it here better. What’s your price of shipping, what’s their freight cost of hauling it internally on their road and their infrastructure. And these are things we were looking at constantly either than the South America on how to place ourselves and how we’re going to address those markets.

Frank Smith – Weirton Fund

Okay and then as far as dormant land and they are done in Imperial Valley. Is that really fortunate it delayed the harvest or did actually effect the yield?

Mark Grewal

No, we – okay storms there was an effect not the weather that happened in Imperial but this was not a typical total California year it was – it’s a low average harvest year in the whole state. So there’s a lot of things that come to play in that. But Frank if you came out to the San Joaquin Valley right now they are picking cotton. And usually cotton’s done – and so we’re just not getting orders and domestically in California for planting alfafa seed it normally would have been planted in September.

They are just now starting to plant in November, in December you got an area of the San Joaquin Valley but doesn’t know what their water supply is going to be till the spring. They are not going to plant till the spring. So what’s happening is where I grew up as a kid and everything was really those first two quarters and as a rule of thumb where do you plant alfafa any month into New York September, October, November, December.

Those were the historical months now this thing is shifting into spring plantings. And in some case it’s a combination of spring planting seed are only for four weeks to first year converted back to seed production. And that’s a lot of what’s happening in the Imperial Valley area we’re almost 40% of the hay productions made in whole state.

Frank Smith – Weirton Fund

Okay and then one last question the GMO trials I see that’s some type of trials do you have any idea as far as how that’s going as far as yield –

Mark Grewal

Our first variety is resistant of roundup so that’s not an issue. It’s been over sprayed at least twice and survived quite well. And so next year is more of a seed production year for building it. And then we take that seed out of that fall cut it out and then by 2015 of the fall we’ll be selling, we’ll be selling the Roundup Ready seeds.

Frank Smith – Weirton Fund

Okay great. Alright gentlemen I’m going to back out here let anyone else ask a question.

Mark Grewal

Thanks Frank.

Frank Smith – Weirton Fund

Thank you.

Operator

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

Matthew Szot

Hey Keith.

Keith Gil – JHS Capital Advisors

Hi Mark, hi Matt. How are you?

Matthew Szot

How are you doing?

Keith Gil – JHS Capital Advisors

In – I guess general terms how many proprietary varieties do you have. How long does it generally take to develop these varieties? And how much does it cost to develop like for your instance your 96.28 or your 97.20 variety.

Mark Grewal

Okay there are lot of questions there Keith but –

Keith Gil – JHS Capital Advisors

I’ve got a big mouth.

Mark Grewal

Basically I could be wrong on this of course we have at least 18 varieties that we own right now. That are non-GMO and we have GMO varieties. Now the GMO varieties if you did that on your own and your biotech. And you’ve had a biotech company like Monsanto. It’s been stated we have lot of articles that to bring one trait is $136 million.

So we have actually have two varieties to have that access in term. And then we have another 18 that are taken approximately nine years to breed when you take that type of IP and you have the breeder, agronomies field farming [ph] the land, the water, the cost to grow the crop and then to actually ramp it up for seed production.

You are anywhere in the minimum of 18 million to 20 million over the nine year period in cost to get that into a commercialized seed production selling platform. So our IP is worth everything but that’s the only that’s the reason why seed companies sell on revenues. And so that’s a supplement its part its part of the game in a seed company, that’s your IP.

Keith Gil – JHS Capital Advisors

Thank you and one of them follow-up if I may I know you guys are looking to be bought but if you’re going to be bought out by Monsanto by DuPont now what have you. How would you value the company?

Mark Grewal

I don’t know Matt if you want to anything on the –

Matthew Szot

Yeah I mean at this point Keith we’re just, we see a lot of low hanging fruit in front of us and we’re keeping our heads down and focusing on create as much shareholder value so we’re not really thinking in those regards as to what we could sell the business for. I’m just trying to create this leverage off of the assets that we have in hand.

Keith Gil – JHS Capital Advisors

Right if I may like when Dairyland was bought by were they bought by DuPont with [indiscernible] or FGI what were they valued at do you know?

Mark Grewal

Well okay FGI is a co-op its owned by Land O’Lakes that’s a $4 billion co-op I don’t know what that price tag was developing all of that company because they also bought out [indiscernible] Dairyland is owned by Dow [indiscernible] is a pioneer so Dow also bought Cal/West Seeds and I don’t what they paid for Cal/West Seeds Keith so we have to look in that data maybe you can talk to some of the analyst and they can come up with some numbers for you.

Keith Gil – JHS Capital Advisors

Okay, thanks.

Mark Grewal

Welcome. Thank you.

Operator

The next question will come from Bill Smith of William Smith & Company. Please go ahead.

Bill Smith – William Smith & Company

Hi, thank you. Hi Mark. If you would value your inventory the 11 million pounds how do you think that, or how should we think about that, is that a mix of Australian and your proprietary and Imperial Valley is that – what that’s comprised of and how should we think about valuing that inventory?

Matthew Szot

Well yes primarily, its primarily comprised of proprietary varieties at 10.7 million pounds that I mentioned that as a cost basis at the end of September of $28 million and you can back into based on a 20% margin what that would have in current environment fair market value.

Bill Smith – William Smith & Company

So when you talk about the seed, maybe 4.5 that’s all proprietary it’s not, that doesn’t you’re not talking about Australia or Imperial Valley?

Mark Grewal

No, let’s take their our proprietary varieties that are very premiere in Australia. Australia is tended a less expensive market to buy and because their costs have been lower and they’ve been happy with 21% margins. What we’re trying to do is an enhance that opportunity by landing some of that seed component that they have into California and getting it branded into a California product that maybe it’s going down to Mexico or into Arizona and is actually competing more with the Cuf with the Cuf market. So it can become a very big margin component even though you might be selling the seed for under $4 their actual margins could be higher than 30% percent Bill.

Bill Smith – William Smith & Company

Okay and demand is it across the board strong or is it just selective varieties that are stronger than others for the demand?

Mark Grewal

Well in the non-dormant market the demand is really big or it’s a question of do you have the actual variety that, that region wants to plant. There’s a constant and – its most farmers are putting one or two varieties – see which gives their area and then they’ll go with that as they move forward and then they become very loyal enter those into that variety placement. So if we took PP amount demand and we right on [indiscernible] and we headed south down highway 43.

Most of those guys would be going all of our – soft, hard varieties 4.5 almost 11/10 per acre already off of [indiscernible] company ground where we’re farming some hay and using that as a marketing tool for a domestic sales. So these are tremendous yields on very tough ground and extreme salt times. And we’re really having a lead product so I think as we move forward and we get our breeders to breed more, different types of dormant seeds and this type of opportunity you’ll see more and more of a margin play. And hopefully at some point maybe Matt can and model that in a way that is more specific to what you look at that or you can understand better than I’m trying to convey.

Bill Smith – William Smith & Company

Okay. Okay, thanks.

Operator

And ladies and gentlemen that will conclude our question and answer session. I would like to turn the conference over to Mark Grewal for his closing remarks.

Mark Grewal

Thank you Denise. Again my thanks to everyone for participating on today’s call we look forward to talking with you again at the conclusion of the current quarter. And I hope everybody has a great afternoon and keep in touch and we’ll try to keep you informed as best as we can.

Operator

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

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